Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Two old(ish) debates: S100 fees decisions and old rules IVAs

 

Firstly, I should warn you: if you find my singular views often wind you up, you might want to skip this post. Here, I air what I suspect are unpopular opinions about two New Rules issues that have been doing the rounds over the past few months: (1) can fees decisions be taken by means of a correspondence vote set to run concurrently with a S100 deemed consent decision; and (2) to what extent do the 2016 Rules apply to IVAs that were approved before 6 April 2017 or that have been approved since then but with terms that refer to 1986 Rules?


 

1. Correspondence votes running concurrently with S100 deemed consent decisions

The Problem with S100 Deemed Consent Decisions

As we know, the deemed consent process cannot be used “to make a decision about the remuneration of any person” and the Insolvency Service has confirmed on its Rules blog that this applies to decisions approving the payment of any SoA/S100 fee. Therefore, unless you are paid the SoA/S100 fee before the liquidation begins, at some stage you will need to instigate a qualifying decision procedure to seek approval and of course you will also want to seek approval of your fees as liquidator at some point.

If these decisions cannot be posed via the S100 deemed consent process, what do you do? Do you wait until after your appointment has been confirmed via the S100 process and then seek a decision, e.g. via a correspondence vote? Or can you instigate a correspondence vote before your appointment? After all, doesn’t R18.16(10) provide for a “proposed liquidator” in a CVL to deliver information on their fees to creditors and doesn’t the table at R15.11(1) refer to “decisions of creditors for appointment of liquidator (including any decision made at the same time on the liquidator’s remuneration)”?

 

The Problems with Pre-Appointment Correspondence Votes

  1. Signing the Notice of Decision Procedure

Can the proposed liquidator sign the notice convening the proposed decision by correspondence? I don’t see any rule empowering a proposed liquidator to act as “convener” of such a process.  Could a director sign the notice?  R6.14 empowers a director to sign a notice for a decision by deemed consent or virtual meeting, but that’s all.  The rules do not appear to empower a director to sign a notice for correspondence vote.

Do the rules need to empower someone to sign such a notice? Isn’t it sufficient that they don’t say that it cannot be done?

It is true that “convener” is defined as an office holder or other person who seeks a decision in accordance with Part 15 of the Rules… but that is simply a definition. To view this definition as giving free rein for any old decision under Part 15 seems a nonsense to me.  If a proposed liquidator or director (other than as provided for under R6.14) were entitled to convene any decision procedure they liked, then this entitlement could surely extend to any “other person”, e.g. a creditor, shareholder, company agent/adviser, receiver… Surely it cannot be open to just anyone to instigate a decision procedure on anything, can it?

Ok, what about if the members had already appointed a liquidator? Could the liquidator sign a notice of decision procedure if he had already been appointed in a Centrebind process? I think the difficulty here is S166(2), which restricts the liquidator’s powers before the S100 decision. The only powers the liquidator can exercise at this time are those in S166(3) and I do not think that instigating a decision procedure on fees falls into the categories of taking control of or protecting company property and disposing of perishable/diminishing-value goods.

  1. Clashing timelines (1)

Setting aside the issue above about who signs the notices, I think there are other reasons why the concurrent correspondence vote for fees pre-S100 does not work: the impossible statutory timelines governing these processes.

R15.11(1) sets the notice period of 3 business days for the S100 decision on the appointment of the liquidator and “any decision made at the same time on the liquidator’s remuneration”.  If the S100 decision is sought by deemed consent and a fees decision is sought by a correspondence vote, two processes are set in motion. That’s fine so far: you could set both processes going with the same decision date, say 14 September. With R15.11(1) in mind, let’s “deliver” the notices on 8 September, to give a clear 3 business days’ notice.

If a >10% creditor objects to the deemed consent decision, then that process terminates and the director must now convene a physical meeting for the purpose of seeking the S100 decision on the appointment of a liquidator. But what happens to the correspondence vote process? This is a different process altogether, so it seems to me that it keeps on going.

But does this create a problem? Yes, I think so. As I mentioned, R15.11(1) sets the notice period for a “decision made at the same time” as the S100 decision at 3 business days, but the correspondence vote decision has now deviated from the S100 decision; the decisions will no longer be made at the same time. However, the notice period for correspondence votes not made at the same time as a S100 decision is 14 days, so in hindsight the liquidator/director has failed to provide enough notice for the correspondence vote. Does this mean that the correspondence vote decision is invalid? Could you abandon the correspondence vote process? There doesn’t seem to be any power in the rules to postpone or cancel a correspondence vote process once started (unless it is terminated by reason of a physical meeting request).

Ok, so one solution might be to make sure that the correspondence vote is arranged with at least 14 days’ notice in any event, so that you don’t fall foul of the notice period if the two processes were to diverge. That may be so, but surely the fact that you could breach the statutory notice period in hindsight in this way is an indication that it was not envisaged that the rules would provide that two independent processes could run concurrently with a shorter notice period.

  1. Clashing timelines (2)

Returning to the example above: notices of a S100 deemed consent decision and a correspondence vote are delivered on 8 September with decision dates of 14 September. What happens if a >10% creditor submits a request for a physical meeting on 15 September? That’s a silly question, you may think, surely they are out of time as the decisions have been made.

I would agree that they out of time for the S100 decision, because R6.14(6)(a) states that “such a request may be made at any time between the delivery of the notice… and the decision date”. However, are they out of time for the correspondence vote? As the correspondence vote for fees is not provided for in R6.14, it would have a deadline for physical meeting requests of 5 business days from the date of delivery of the notice (R15.6(1)). Therefore, notwithstanding that the decision date had already passed, it seems that the creditor’s physical meeting request could impact the proposed fees decision. That’s nonsense, you say. I would agree, so I believe this is another reason why the rules could not have been intended to provide for a correspondence vote to run concurrently with a S100 deemed consent process.

Ok, what if you followed the same solution suggested above: convene the correspondence vote with at least 14 days’ notice? Wouldn’t this easily accommodate the 5 business days timescale for requesting a physical meeting? Yes, I suppose it could, but imagine then that you received a request for a physical meeting on business day 6. What would be the consequence: would you consider that the request only stopped the S100 liquidator decision, whereas the correspondence vote on fees could continue to its original decision date? Interesting… so the S100 physical meeting could decide on a different liquidator, who would take office with an already-approved fees decision in which he had taken no part. That would be odd!

 

So where does this leave correspondence votes running concurrently with a S100 deemed consent decision?

I think that, for these reasons, concurrent correspondence votes just do not work: the statutory timescales throw up all sorts of impossible or at least risky scenarios, but more fundamentally there is no one empowered by the rules to sign the notice of decision procedure.

 

But then why do the rules allow proposed liquidators to issue fees-related information?

I believe this is because a fees decision could be proposed pre-appointment: via a S100 virtual – or indeed, where required, a physical – meeting.

Such meetings do not suffer any of the problems described above:

  • the notice of the meeting decision procedure is signed by the director under R6.14;
  • the fees decision(s) can be proposed and made at the meeting “at the same time” as the S100 liquidator decision and therefore the fees decisions can be sought on 3 business days’ notice;
  • there is no possibility of the S100 liquidator decision and the fees decisions diverging, because a S100 virtual meeting can only be stalled by a physical meeting request (not also by a deemed consent objection) and this would terminate the virtual meeting process set up to consider all the decisions; and
  • as the fees decisions have been proposed via a notice of decision procedure issued under R6.14(2)(b), the deadline for requests for a physical meeting is set by R6.14(6), which would apply to all decisions proposed for consideration at the virtual meeting.
  • The possibility of proposing fees decisions via a S100 virtual/physical meeting also makes sense of R18.16(10), because in order for the creditors to consider a fees decision at the meeting, the proposed liquidator needs to send the fees-relevant information beforehand.

 

Haven’t we been here before?

I accept that my concerns above are purely technical. I am reminded that so too was the debate that arose in October 2015 about whether IPs could issue fee-related information before they were appointed liquidators so that fees resolutions could be considered at the S98 meetings. It seemed to me that the profession quickly became divided into two camps: those who took comfort in Dear IP 68 that stated that the intention was not to preclude pre-appointment fee estimates and those who, notwithstanding the clarification of such intention, chose to avoid falling foul of an apparent technicality in the rules by seeking fee approval only after appointment. The 2016 Rules – R18.16(10) referred to above – have resolved that old issue, but we now have a different set of technicalities affecting attempts to seek fee approval by S100-concurrent correspondence votes.

Can we expect the regulators to clarify their intentions and regulatory expectations on this question? We can only hope! However, if the answer were on the lines of Dear IP 68 (i.e. the rules might not exactly say this, but this is what we intended), then would this help or would we, without a legislative fix, still be left to choose between two camps? I hasten to add that I have no idea on which side of the fence the regulators might fall on this new question in any event.

 

Are the issues only about the technical?

In exploring the above issues with people at the Insolvency Service and the IPA, both have raised concerns – aside from the purely technical – about the appropriateness of proposing decisions on liquidators’ fees before appointment.

I understand that there are concerns about the huge amount of documentation – the Statement of Affairs, SIP6 information, fees and expenses related information – that creditors would be expected to absorb and vote on potentially in less than 3 business days. There seems to be slightly less concern attaching to fee-approval sought via a S100 virtual meeting, I think because this is seen to provide creditors with a forum in which to explore matters in an attempt to assess the reasonableness of fee requests. However, I believe there are also concerns about how IPs can put forward a reasoned and justifiable case for post-appointment fees before they have got stuck into the appointment.

There are clearly lots of factors to weigh up here, factors that may impact more than simply the rights and wrongs of correspondence votes running concurrently with S100 deemed consent decisions. In view of the serious ramifications of getting fees decisions wrong, I do hope that the regulators put their heads above the parapet and tell us all their views on these matters soon.


 

2. VAs incorporating 1986 Rules

The Problems with VAs based on 1986 Rules: the story so far

The issue I’ve blogged about before (https://insolvencyoracle.com/2017/05/02/new-rules-emerging-interpretations-part-1/) is: how far should you apply the 2016 Rules as regards VAs that incorporate 1986 Rules?

Dear IP 76 contains the following statements by the Insolvency Service:

  • the IVA Protocol’s Standard Terms’ reference to calling meetings “in accordance with the Act and the Rules” means the amended Act and the 2016 Rules;
  • the Act and 2016 Rules “remain silent on how decisions are taken” in VAs;
  • supervisors should not “feel restricted to only using a physical meeting”; and
  • the Insolvency Service “expect[s] supervisors to take advantage of the new and varied decision making procedures”.

I blogged my concerns about these statements:

  • If calling meetings “in accordance with the Act and the Rules” means the new provisions, which are indeed silent as regards meetings in approved VAs, then we must look to the statutory provisions for Trustees, because paragraph 4(3) of the Protocol Standard Terms states that supervisors should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”. Therefore, does this mean that in fact a supervisor is prohibited from calling a physical meeting by reason of S379ZA(2) in the same way as a Trustee is?
  • How can a term stating that “a supervisor may… summon and conduct meetings” equate to “a supervisor may seek a decision by, say, an electronic vote”?
  • Dear IP focused on the wording of the IVA Protocol, whereas I believe that consideration of the R3 Standard Terms leads to very different conclusions, because the R3 Standard Terms are almost entirely independent from any Act and Rules provisions.

However, after I’d blogged, R3 issued its own statement, which included:

“The current R3 Standard Conditions refer to ‘meetings of creditors’ rather than making specific reference to the Rules. R3 is also of the opinion that IPs are not restricted to using physical meetings of creditors only when seeking the views of creditors and that the full range of decision making procedures introduced by the new Rules are available to the supervisor. It could also be argued that section 379ZA of the Act which prevents physical meetings being held except in limited, defined circumstances, applies to existing arrangements…

“We are of the opinion that the current version of the Standard Conditions continues to be relevant and supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors. For the avoidance of doubt however nominees may wish to seek their own legal advice on the wording to be used when seeking variations of the arrangement and supervisors may wish to seek their own legal advice on the procedures to be followed for decisions of creditors to be taken on arrangements approved before the introduction of the new Rules.”

My problems with R3’s Statement

R3’s statement floored me. Not only did it repeat what I consider are the Insolvency Service’s flawed arguments, but in view of the wording of R3’s Standard Conditions for IVAs, it gave me even more reasons to disagree:

  • Again, how can the R3 Standard Conditions’ “meetings of creditors” be translated to mean “the full range of decision making procedures”, especially as the R3 Standard Conditions do not make specific reference to the Rules? That is, the R3 Standard Conditions contain the entire process of calling and holding a meeting, which is not dependent on any Rules, and so what entitles a supervisor of an IVA incorporating the R3 Conditions to walk away from those Conditions and decide to do something completely different contained in Rules, which are “silent” on VA processes?
  • I am doubtful that S379ZA “applies to existing arrangements” that incorporate the R3 Standard Conditions. The reason why I blogged that S379ZA(2) might apply to Protocol IVAs is because the Protocol Standard Terms refer to calling meetings “in accordance with the Act and the Rules”, but these words are missing from R3’s Standard Conditions. S379ZA(1) states that the section “applies where, for the purpose of this Group of Parts, a person seeks a decision from an individual’s creditors about any matter”. The “Group of Parts” comprises Ss251A to 385, but as we all know this Group of Parts does not refer to a decision to vary an IVA (it only speaks of approving the IVA). Therefore, how can S379ZA, which prevents physical meetings from being held unless requested by creditors, apply to already-approved IVAs incorporating R3’s Standard Conditions? I appreciate that R3 has only stated that “it could… be argued”, but is it responsible to give some weight to such a feather-light argument?
  • I am also not persuaded that “supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors” because of the principles in the case set out below.
  • (And, if I wanted to be really picky, I’d question what “nominees” have to do with varying arrangements!)

 

William Hare Ltd v Shepherd Construction Ltd

In the case of in William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC) (25 June 2009), a subcontractor (“H”) was engaged in December 2008 to carry out some work for the main contractor (“S”). The sub-contract defined the employer’s insolvency with reference to: the appointment of an administrative receiver, insolvent liquidation, winding-up by court order and “an administration order made by the court”.

When the employer was placed into administration, S issued notices withholding payment. H argued that, because the employer had gone into administration via a directors’ appointment and not via a court administration order, the withholding notices were invalid, as the employer had not gone insolvent according to the sub-contract’s definition. S argued that it would be absurd for the sub-contract to be construed as ignoring the later amendments to the 1986 Act and that all routes to administration under the 1986 Act as amended were covered by the wording of the sub-contract.

The judge was “in no doubt” that H’s construction of the sub-contract was to be preferred and he held that the court should not rewrite the sub-contract to allow for the amendments to the 1986 Act. His reasons included the following:

  • The meaning of the words was plain and there was no reason to believe that the parties did not intend to use the words as they were written or that they had made a mistake in using the words. In contrast, S’s construction involved “a significant rewording of the clause”.
  • The sub-contract had been made long after the Act had been amended. In this case, the parties agreed that they must be deemed to have known about the amendments to the Act when they made the sub-contract. “In these circumstances it is appropriate to view the failure to amend clause 32 as a choice, as a deliberate decision to include one particular method of administration.”
  • If it were needed, the principle of contra proferentem – that, when there is doubt about the meaning of a contract term, the words may be construed against the person who put them forward – supported H’s construction.
  • Because the sub-contract was executed after the change in the legislation, sections 17 and 23 of the Interpretation Act 1978 (which incidentally are the provisions that Dear IP cited in support of the opinion that the 2016 Rules replaced the 1986 Rules in the Protocol Terms, because they refer to the 1986 Rules “as amended”) were not relevant.

 

The relevance of this case to New IVAs using Old Rules Terms

Say, you are a supervisor of an IVA that was approved last week and the IVA Proposal incorporates R3’s current Standard Terms (or indeed any Terms) that continue to refer throughout to the 1986 Rules.

Surely the principles in the case above cast serious doubt on whether you are free to translate those 1986 Rules into 2016 Rules, don’t they? You, as the debtor’s adviser, had deliberately put forward a Proposal that refers to 1986 Rules in the knowledge that the Rules have changed and it seems that the Interpretation Act 1978, which was the backbone of the Insolvency Service’s argument set out in Dear IP 76, is of no effect. Therefore, is there not a strong argument that you intended to incorporate 1986 Rules into the IVA?

I think also about the debtor and unsophisticated creditors: based on the Terms, they might expect a meeting of creditors in order to vary the Proposal, so what could their reaction be if they were to receive notice of a correspondence vote or perhaps even a notice seeking deemed consent? It seems to me that, if you were to say: “ah yes but the 2016 Rules changed things”, I might respond: “yes, but those changes happened in April, so why did you produce Terms after this that still referred to creditors’ meetings?”

 

Maybe I should accept that the Emperor is wearing clothes!

I have no doubt that the Insolvency Service and R3 have opinions backed up with legal advice. Of course, I am not suggesting for one moment that their statements should be ignored, but I feel I must say things as I see them. I am also not the only one who believes that the InsS and R3 have got this one wrong. I am not surprised therefore that R3 refers to seeking legal advice. No one can be certain how a challenge in court would pan out.

But in practice does the answer to this question really matter? If debtors, creditors and supervisors are happy to consider agreeing variations proposed in a manner that is not strictly according to the Terms, who is going to challenge it? Presumably also the RPBs aren’t going to take a different tack to that set out in Dear IP. And even if a debtor were to dispute the soundness, say, of a creditors’ decision to terminate an IVA, maybe the court would conclude that it was simply a technicality that has no real practical effect on the majority creditors’ wishes… but nevertheless it could make for an expensive debate.

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New IP Fees Rules: Simples?

0434 Brown lemur2

With little more than benign overviews of the new fees rules out there, I thought I would examine them a bit closer.  What are the practical implications of the rules and do they contain any risky trap-doors?

My overriding thoughts are similar to those I have on the pre-pack changes: in an apparent effort to improve transparency, is the whole process becoming so unwieldy that it will turn IPs off altogether?  Maybe that’s the plan: make it so difficult to seek time costs that IPs switch to fixed/% fees.

As you know, the new rules take effect from 1 October 2015.  They can be found at: http://goo.gl/mekR5j.

Stephen Leslie, for Lexis Nexis, has produced a good basic summary of what they contain at: http://goo.gl/eqs9Aq.  R3’s Technical Bulletin 109 and Dear IP 65 also cover the subject.

S98s: same problem, different solutions

For CVLs, when should the liquidator set out his fees estimate?

R4.127(2A) will state that “the liquidator must prior to the determination of” the fee basis give the fees estimate (and details of expenses) to each creditor.  It seems to me that reference to “liquidator” requires the IP to be in office – so the fees estimate cannot be provided, say, along with notice of the S98 meeting.

But am I reading too much into this?  After all, R2.33 currently refers to pre-administration costs incurred by the “administrator”, when clearly the IP isn’t in office as administrator when the costs are incurred.  Therefore, maybe reference in the new rules to “liquidator” similarly is sloppy-hand to include “the person who would become liquidator”.  If that is the case, then maybe the expectation is that IPs will provide fees estimates along with S98 notices with a view to running S98 meetings along the same lines as they are at present.

Of course, then there’s the argument about how an IP is supposed to come up with a sensible estimate before he knows anything about the case.  Ok, he will have a better idea – but still not a great one – when the Statement of Affairs is drafted, but that’s little more than a few scribbles on a page, if that, at the stage when the S98 notices are issued.  So how long “prior” to the resolution should the liquidator “give” the information?  Given that S98s are pretty swift events anyway, would it be acceptable to send estimates the day before the S98 meeting..?

A confabulation of compliance consultants, especially with nothing more to guide us than a handful of new rules, is bound to generate a variety of proposed solutions.  Here are just three of them:

(i)         The return of the Centrebind

A Centrebind would overcome the problem of the IP being in office at the time of issuing the estimate and 14 days or thereabouts would seem sufficient to provide creditors with a reasonable estimate before the S98 meeting.

Of course, Centrebinds went out of fashion because of the limited powers the members’ liquidator has before the S98 meeting is held.  It’s not a great place to be as an office holder.  Do we really want to return to that practice wholesale?  And given the Cork Committee’s dissatisfaction over Centrebinds, would the regulators take a dim view if the practice were taken up again just to ensure that the IP could get his fees approved at the S98 meeting?  Some might argue that it’s the most practical way of working with the rules, but are there alternative solutions..?

(ii)        A second creditors’ meeting

This was my first thought when I read the rules: why seek a fees resolution at the S98 meeting?  Would it really be such a chore to convene another creditors’ meeting soon after appointment?

True, it would add another chunk of costs to the estate, but would IPs be criticised for taking this approach?  After all, how much of a solid estimate can an IP give before he truly knows what is involved in the case?  In my view, the costs of convening a second meeting would be entirely justifiable, as it seems to be the way the rules are pushing IPs.  Indeed, the rules as a whole are hardly cost-saving, given the additional work IPs will need to undertake to provide estimates and seek increases, if necessary later on.

Of course, in having a second meeting, IPs run the risk that the creditors already will have lost interest and they’re left with inquorate meetings and no resolution.  Also, as the liquidator (or an associate) will be chairman of the second meeting, they won’t be able to rely on the director-chairman’s vote or his use of general proxies.  However, the practice of looking to the director to approve the liquidator’s fees is viewed with scepticism anyway – many observers don’t recognise that, with so little creditor engagement, it’s sometimes the only practical way – so maybe it is a practice that we should be distancing ourselves from in any event.

(iii)       Fixed fees

This wasn’t my idea, but I see the attraction of it, particularly for “burial jobs”.

Given all the hassle of providing a detailed estimate of time costs, why bother, especially on jobs where in all likelihood the time costs incurred will outstrip the asset realisations net of other costs?  If liquidators were to seek a fixed fee, they would still need to provide, prior to the fees resolution, “details of the work the liquidator proposes to undertake and the expenses the liquidator considers will, or are likely to be, incurred”, but they could avoid providing the full estimated time costs breakdown.

Thus (provided that the IP doesn’t need to be in office as liquidator at the time), along with the S98 notices or just before the meeting, the IP can provide a pretty standard summary of tasks to undertake in any liquidation and set out the proposal to seek fees of £X.  If the SoA shows assets of, say, £15,000, the SoA/S98 fee is £7,500 of this and there are a few £hundreds of standard expenses, a fixed fee of £10,000 would seem reasonable to cover everything that a liquidator needs to do and, 9 times out of 10, there would be no need to seek an increase.

I guess that the proxy forms should list the proposed fee resolution in full, which would suggest that the IP knows what he wants to charge at the point of issuing the S98 notices.  As mentioned above, this would involve a degree of uncertainty, but for IPs working in the burial market, I can see that the risk is outweighed by the simplicity of this approach.  With Reg 13 ditched, IPs might not need to maintain time records* – what could be simpler?! – and they wouldn’t suffer the closure Catch 22 of billing time costs at a point when they haven’t yet spent the time closing the case.

But does this solution have legs for anything other than the simplest of jobs, where the IP would always be looking at a time costs write-off from the word go?  On its own, I don’t think so.  However, I don’t think it would be beyond the realms of possibility to devise a fairly standard formula for seeking fees on a combination of a fixed sum and a percentage basis.  This might help address any unexpected asset realisations, for example antecedent transactions or hidden directors’ loans.  Seeking percentage fees of such asset realisations would also deal with the concerns that it may be both impractical and indiscrete to propose fees estimates detailing what investigatory work is anticipated and how much that is likely to cost.

With several possibilities available, evidently S98s will require some thought and planning in readiness for 1 October.

* Although the Insolvency Practitioners (Amendment) Regulations 2015 are removing the Regulation 13 IP Case Record and thus, with it, the specific requirement to maintain “records of the amount of time spent on the case”, I do wonder whether an IP will be expected to continue to be prepared to meet the requirements of R1.55, R5.66 and Reg 36A of the 1994 Regs as regards providing time cost information to pretty-much any interested party who asks.  I know that no one asks, but with the continued existence of these Rules and Reg, does the abolition of Reg 13 really mean the abolition of time cost records in fixed/percentage fee cases?

Administrations: confusing

Of course, when tinkering with fee approval, it was always going to prove confusing for Administrations!  Here are a few reasons why:

Para 52(1)(b) cases

The current Act & Rules do not prescribe the process for seeking fee approval from secured (and preferential) creditors in Para 52(1)(b) cases.  Therefore, particularly where the Administrator has been appointed by a secured creditor and so will be reporting to his appointor outside of the statutory process, often a request is made very early on for approval for fees.

In future, if the Administrator is looking for time costs, he will need to “give to each creditor” the fees and expenses estimates before “determination” of the fee basis.  This indicates to me that an Administrator will not be able to seek approval for fees from a secured creditor before he has issued his Proposals to all creditors… unless he sends the estimates to all creditors in something other than his Proposals (unlikely)… or unless approval rests with other creditors in addition to his appointor – i.e. another secured creditor or also the preferential creditors – because it would seem to me that the basis of his fees is not “determined” until all necessary creditors have approved it.

This also means that an Administrator’s Proposals will have to include the fees and expenses estimates even for Para 52(1)(b) cases.  I can see some sense in this, as unsecured creditors can always requisition a meeting to form a committee that will override the secureds’/prefs’ approval of fees.  However, it seems quite a leap in policy, given that the full SIP9 information is not currently required in Proposals in these cases.

Changed outcomes

I am not surprised that the Service has introduced a new rule to deal with some Administrations where the prospective outcome has changed so that a different class of creditors is now in the frame for a recovery.  The Enterprise Act’s dual mechanism for obtaining fee approval depending on the anticipated outcome was always meant to have ensured that fees were approved by the party whose recovery was reduced because of the fees.  It’s true that the Act & Rules often do not deliver that consequence (not least because Para 52(1)(c) cases aren’t dealt with at all properly), but that has always been touted as the policy objective.

Sure enough, Dear IP 65 repeats this objective: “the new provision revises to whom the office holder must make a request or application in such circumstances [as described below] to make sure that such matters are determined by parties with the appropriate economic interest”.  Yes, but does it..?

In future, if fees have been approved on a Para 52(1)(b) case by secureds/prefs and the Administrator wants to draw fees in excess of the previous estimate, but he now thinks that a (non-p part) unsecured dividend will be made, he will need to seek approval from the unsecured creditors.  Fine.

However, there is no new provision to deal with outcomes changing in the other direction.  For example, if an Administrator originally thought that there would be a (non-p part) unsecured dividend – so he sought approval for fees by a resolution of the unsecured creditors – but now he thinks that there won’t be a dividend and maybe even that the secureds/prefs will suffer a shortfall, to whom does he look for approval of fees in excess of the previous estimate?  From what I can see, he will still go to the unsecured creditors.

[Theoretically, he might be able to issue revised Proposals in which he makes a Para 52(1)(b) statement, so that the secureds/prefs have authority to approve his fees.  In any event, the changed outcome might make revised Proposals appropriate.  But then what?  Would that result in the basis of his fees not being “determined” with the consequence that he has to issue fees and expenses estimates again to every creditor before he can seek the secureds’/prefs’ approval to the basis of his fees?]

Given that the OFT study concluded that secured creditors are so much better at controlling fees than unsecureds are, why not hand the power to secured creditors automatically by means of the new rules when the outcome deteriorates, in the same way that they shift the power automatically from the secureds to the unsecureds when the outcome improves?

Transitional provisions

This is more just a headache than confusing: one more permutation to accommodate in systems.

In general, the transitional provisions are designed so that, if an IP takes office after 1 October 2015, he will need to go through the new process to get his fees approved.  In effect, they treat Para 83 CVLs as new appointments, so the new rules disapply R4.127(5A) for Para 83 CVLs beginning after October in relation to Administrations that began before October.  Thus, Para 83 CVL Liquidators will not be able to rely on any fee approvals in the Administration.  Instead, they will have to go through the new process.

However, R4.127(5A) kicks back in for Para 83 CVLs following Administrations that begin after 1 October.  This is because, in these cases, the Administrator will have already gone through the new process in order to get fee approval, so it seems reasonable that the Liquidator can continue to rely on this approval.  Of course, the Liquidator will be subject to the Administrator’s fee estimate, so if he wants to draw fees in excess of the estimate, he will need to go through the new process for approval.

It might seem a bit much to expect an Administrator to be able to estimate a subsequent Liquidator’s fees.  For once, I think that the Insolvency Service has been sensible: the rules state that the Administrator’s estimates may include any subsequent Liquidator’s fees and expenses, not must – it’s good to see office holders left with a choice for a change!  Thus, where the Administrator’s estimates have not provided anything for the Liquidator, an increase in the estimate is probably going to be one of his first tasks.

I wonder if an Administrator’s estimate might be devised so that, if he has not used up his estimate in full, then it can be treated as the Liquidator’s estimate..?  I suspect the regulators might take a dim view of that…

Compulsory Liquidations: inconsistent treatment?

I didn’t spot this one, but it was passed to me by a Technical & Compliance Manager (thank you, D).

As explained above, the transitional provisions seem to be designed so that the critical date is the date of the IP’s appointment, rather than the more commonly-used insolvency event date.

It gets complicated, however, when one tries to define every way that an IP can be appointed.  For compulsory liquidations, the transitional provisions cover appointments (post-1 Oct) by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140).

What about appointments by the Secretary of State (S137)?

I cannot see why these appointments should be treated differently.  Does this mean that no Secretary of State appointments will be subject to the new rules?  Or does it mean that all SoS appointments will be subject to them..?

I have asked the Insolvency Service for comments.

Practical difficulties

Of course, there are practical difficulties in devising fee and expenses estimates for each case.  The Impact Assessment for the new rules (http://goo.gl/vCOsnS) state: “Based on informal discussions with IPs and internal analysis by the Insolvency Service it has been estimated that the costs of learning about the new requirements will be relatively moderate as in many cases IPs produce estimates of the work they will be undertaking for their own budgeting purposes. Therefore the industry has the pre existing infrastructure in place to produce estimates and so there will no additional set up costs for business. All the information that will be needed for the estimates is already available to IPs so there will be no additional costs of gathering information” (paragraph 34).  What nonsense!  Even if IPs do estimate fees at the start of a job, they are little more than finger-in-the-air estimates and are way less sophisticated than the new rules envisage.

The Insolvency Service followed up this nonsense with the suggestion that it would take IPs 1 hour to get their systems up to scratch for the changes!  Personally, I feel that such a fantasy-based statement is an insult to my intelligence.

In relation to generating fee and expenses estimates, the Impact Assessment states: “The work is likely to be an administrative task extended from the existing practice to produce estimates for business planning so we believe the work is likely to be completed by support staff within practices. It is estimated that the task will take around 15 minutes per case” (paragraph 36).  This is just so much nonsense!

Anyway, back to the practicalities…

The Insolvency Service has explained that it is working with the JIC to tackle “the key challenge… to present this information [the fees and expenses estimates] in a clear, concise format that the creditor, i.e. the end user, finds both useful and informative” (Dear IP 65, article 55).  I guess we are talking here about a revised SIP9.

Given that it has taken the IS/JIC ten months (and counting) to complete a revised SIP16 following Teresa Graham’s report, how close to the 1 October deadline do you think we’ll get before we see a revised SIP9?  I know that the SIP16 revision has been dependent on the pre-pack pool being set up, but I reckon it’s all going to get a bit tense towards early autumn.

The issue is: do we gamble now on what we think the regulators will want or do we sit and wait to see?  The new rules require that time costs fee estimates specify:

“details of the work the insolvency practitioner and his staff propose to undertake… [and] the time the insolvency practitioner anticipates each part of that work will take”. 

Is it a safe bet to assume that the regulators will expect a SIP9-style matrix, classifying work as Admin & Planning, Investigations, Realisation of Assets etc.?  Will they also want the estimate to list, not only the total time costs per work category, but also the time costs per staff grade, i.e. the hours plus time costs?  Will they also want a greater level of detail, say breaking down the Admin & Planning etc. categories into sub-categories, for cases where time costs are anticipated to exceed £50,000?  Conversely, what level of detail will they expect for cases with time costs estimated at less than £10,000, given that at present SIP9 requires only the number of hours and average hourly rate to be disclosed for fee-reporting purposes? Finally, will these expectations be, as they are now, set out as a Suggested Format, or will there be required disclosure points?

Given that the rules refer to “each part of that work”, personally I would get cracking now to devise systems and models to produce fees estimates styled on the table in the SIP9 appendix.  I might run some analyses of past cases to see if I could come up with some sensible tables for “typical” cases, maybe examine some outliers to see, for example, how much it costs to realise some difficult assets or pay dividends, depending on the class and number of creditors.  Setting up such templates and systems to capture the key elements of each case is going to take time.  We have less than six months.

Not quite so urgent, but just as systems-based, is the need to design mechanisms for monitoring fees estimates.  It would be useful to know if the major software-providers are designing tools to compare fees estimates to fees taken – much like the bond adequacy review – and whether these tools can be used to identify cases where fees are approaching estimates.

And of course, the rules provide loads more work on creating and revising standard documents and checklists *sigh*!

Finally, an obvious practical difficulty will be ensuring that creditors are still sufficiently engaged some way down the insolvency process to put pen to paper and approve additional fees.

Techies’ corner

I know that the following points are nit-picky, but, as we’re talking about fees approval, I felt that they were important to get right.

When does remuneration arise..?

We’ve had drummed into us that “remuneration is charged when the work to which it relates is done” (R13.13(19)).  This definition was introduced with the new progress reports so that IPs disclose time costs incurred, not just remuneration drawn.

But how does this definition fit with the new rules that state that “the remuneration must not exceed the total amount set out in the fees estimate without approval”?  Does this mean that we need to ask creditors to approve an excess before the time costs are incurred, i.e. before the work is done?  And what if the IP is prepared to write off the excess, does he still need to seek approval?

Yeah, I know, it’s pretty obvious what the intention of the rules is, but I asked the Insolvency Service anyway.  Their lawyer’s view was that the “court would resolve any tension” between the rules by coming to the conclusion that the new rules make it “sufficiently clear that the office holder is permitted to incur additional fees above the level of the estimate, before securing further approval”, because the same rules state that a request for approval must specify the reasons why the office holder “had exceeded” (or is likely to exceed) the fees estimate.  It’s the drawing down of additional fees that would be prohibited without approval, not the incurring of them.  Fair enough.

What “creditors” should be asked in Para 52(1)(b) Administrations..?

I have drafted the article above on the basis of the Insolvency Service’s answer to my second question, although I have to say that I think they could have done a better job at drafting the rules on this one.

New R2.109AB(2) explains which party/parties the Administrator should approach for approval of fees in excess of the estimate.  There are three choices, dependent on who fixed the fee basis in the first place:

“(a)  where the creditors’ committee fixed the basis, to the committee;

“(b)  where the creditors fixed the basis, to the creditors;

“(c)  where the court fixed the basis, by application to the court”.

My question was: if a secured creditor alone fixed the basis, who should approve the excess?  It can hardly be said that “the creditors” approved the basis.  Also, given that the OFT study had concluded that secured creditors seem to control fees quite adequately, perhaps it was felt that there was no need to add another layer of control in these cases…

The Insolvency Service’s response was: “it would be for the secured/preferential creditors to approve if the para 52(1)(b) statement held good. We think the wording of the Rules is sufficiently clear in this regard”.  Well, I’m glad I asked!

 


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The Value of RPB Roadshows: Forewarned is Forearmed

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Having just returned from a fantastic trip to Vietnam and Cambodia, I have yet to catch up on domestic news, so I thought I’d plug the silence gap with some tips that I picked up from the RPBs’ autumn roadshows.

Ethical issues featured heavily at the ICAEW roadshow, whilst the IPA roadshow raised some controversial Administration points, and both RPBs had much to say about handling complaints in the wake of the Insolvency Service’s Complaints Gateway.

Ethical Issues (ICAEW Roadshow, Birmingham, 9 October 2014)

Allison Broad of the ICAEW described the following ethical dos and don’ts:

• In order to identify any prior relationships before deciding whether to take an appointment, do not rely solely on the company director signing off confirmation that s/he is not aware of any conflicts/relationships; internal checks are still required.

• Ensure that relationships are evaluated, not merely identified. Allison gave the example of an IP who had noted on his ethics checklist that the director of the prospective appointment had been a director of eight other companies that had gone insolvent with the IP acting, but the checklist evidenced no evaluation of the threat to the ethical principles that these prior relationships presented. Personally, I have also seen cases – although not quite as striking as this – where a prior relationship existed but it was not noted on the ethics checklist. Even though an IP may have concluded that a relationship is not sufficiently significant to require the introduction of safeguards or to raise concerns about the appropriateness of taking the appointment, files should disclose the relationship and evidence the IP’s consideration of its significance. In my view, failure to do so, not only could constitute a breach of the Ethics Code (paragraphs 74 and 75), but is also bound to raise suspicions that checklists are completed on auto-pilot and insufficient thought is given to ethics matters.

• Ensure that the IP signs off the ethics checklist, if not before the appointment, then as close to it as possible in order to demonstrate that consideration of ethical matters had been considered before appointment.

• Keep ethical threats under review throughout the life of the case, e.g. by including on case reviews a question – not a simple tick-box – as regards how any safeguards employed to manage a threat have been working.

• Review regular introducers’ websites prior to taking the first appointment from those sources and regularly thereafter, as website contents are frequently refreshed. Allison acknowledged that pre-packs and phoenix services may be covered on websites, but she urged caution when dealing with introducers who position these items at the top of their lists or prominently.

• If an IP feels that the quality of an introducer’s advice to directors/debtors is below par, it is not sufficient to allow the relationship to continue on the basis that at least the IP can ensure that s/he provides good advice. The ICAEW expects IPs to write to the introducer with any concerns and ask that changes be made to their websites and practices. They would then expect IPs to check whether these had been actioned and, if the introducer does not do so, the IPs should terminate the introduction relationship.

Administration Technicalities (IPA Roadshow, London, 22 October 2014)

Caroline Sumner of the IPA highlighted several issues identified on monitoring visits.  However, I think I must have been in a particularly argumentative mood on the day, as my notes are fairly scant on Caroline’s comments about SIP16, SIP13, and the new SIPs 3 – from memory, I think that none of this was rocket science; Caroline just highlighted the need to get them right – but I went to town on some other points she made:

  • Caroline described the Insolvency Service’s view that Administrators’ Proposals should describe only one of the Para 3 administration objectives that the Administrators propose to achieve.

I have a problem with this: firstly, in what respect is this reflected by the statutory requirements?  R2.33(2)(m) requires Proposals to include “a statement of how it is envisaged the purpose of administration will be achieved”.  An old Dear IP (chapter 1, article 5) referred to this and also to Para 111(1) of Schedule B1, which states “’the purpose of administration’ means an objective specified in paragraph 3”, leading to the Service’s conclusion that “administrators should not simply include all three objectives with no attempt to identify which is the relevant objective”.  That’s all well and good – and I think that IPs have moved away from many early-style Proposals, which did reproduce Para 3 verbatim – but I do not see how these statutory provisions require an IP to pin to the mast only one Para 3 objective to endeavour to achieve.

Here’s an example: what would be wrong with an Administrator’s Proposals stating that the company in administration is continuing to trade with a view to completing a sale of the business as a going concern, which should generate a better result for creditors as a whole – and thus achieve administration objective (b) – but if a business sale is not possible, a break-up sale is likely to result only in a distribution to secured/preferential creditors – and thus achieve administration objective (c)?  In my mind, this is the most transparent, comprehensive, and helpful explanation to creditors and certainly is far better than that which the Insolvency Service seems to expect IPs to deliver: for Proposals simply to state that a going concern sale is being pursued to achieve objective (b) is to provide only half the story and, I would argue, would not comply with R2.33(2)(m), as the Proposals would not be explaining “how it is envisaged the purpose of administration will be achieved” in the event that a business sale is not completed.  Para 111(1) simply leads me to an interpretation that an Administration’s eventual outcome – not necessarily the Administrator’s prospective aim – is the achieving of a single objective, which is supported by the Act’s presentation of the objectives as an hierarchy notwithstanding that in practice it is easy to see how more than one objective might be achieved (e.g. rescue of the company and a better result for creditors as a whole).

At the roadshow, I asked Caroline whether she felt that, if the singly-selected objective turned out to be not achievable, the Administrator would need to go to the expense of issuing revised Proposals.  She accepted that, of course, the IP would need to consider that requirement (although I wonder how the decision in Re Brilliant Independent Media Specialists (https://insolvencyoracle.com/2014/10/07/how-risky-is-it-to-act-contrary-to-a-creditors-committees-wishes-and-other-questions/) impacts on this).  Is this really what the government intended?  What happened to the drive to eliminate unnecessary costs?

Finally, I think that this view puts a new colour on the statutory requirement to issue Administrators’ Proposals as soon as reasonably practicable.  Could it be argued that asarp is only reached once the Administrator is reasonably confident of the single objective that he/she envisages achieving?  The RPBs have tried hard to promote the asarp requirement, rather than the 8-week back-stop, but insisting on a single objective in Proposals could encourage a turn in the tide.

I have asked Caroline to clarify the Insolvency Service’s view.  However, if the Service does expect IPs to adopt this approach, I think they should set it down in a Dear IP – of course, assuming that my arguments hold no water – so that all IPs are forced to accept the same burdens.

  • Caroline repeated the Dear IP article that extensions should be sought at the outset only in exceptional cases where it is clear that more than 12 months will be required to complete the Administration.

Although Caroline didn’t go into the technicalities of how an extension might be agreed at an early stage, it gave me cause to revisit the Dear IP article (chapter 1 article 12).  It describes the “questionable” practice of seeking consent for an extension “with the administrator’s proposals including a conditional resolution regarding the extension of the administration, along the lines that if the administrator should think it desirable, then the administration would be extended by an additional six months”.  Over the years I have seen this done, but I have not seen it done properly, i.e. compliant with the Rules.

R2.112(2) requires requests to be accompanied by a progress report, but Proposals are not a progress report.  I guess that a Proposals circular could be fudged to fit the prescription for a progress report as set out in R2.47, but this would have consequences, such as the need to file the Proposals/report with a form 2.24B (as well as filing the Proposals individually) and the clock would be re-set so that the next progress report would be due 6 months afterwards.  Also, how does an Administrator meet the statutory requirement to issue a notice of extension as soon as reasonably practicable after consent has been granted, if s/he has obtained such a “conditional” resolution?

My recommendation would be to avoid seeking extensions in the Proposals altogether, but instead leave them until the first progress report is due.  Of course, if an Administrator has to convene a general meeting (or deal with business by correspondence) at a time other than the Para 51 meeting, this will attract some additional costs, but if the request is made at the time of the statutorily-required 6-month progress report, those additional costs are relatively small, aren’t they?

Complaints-Handling

Complaints-handling was covered at both the ICAEW and the IPA roadshow, which I suspect has as much, if not more, to do with the likely pressure from the Insolvency Service on RPBs as it has with any perceived extent of failings on the part of IPs.

Both Allison and Caroline covered the need to explain how complaints can be made to the Complaints Gateway, although I do feel that generally RPBs have not done much to publicise their “requirements”.  The only guidance I’ve seen is on the ICAEW’s blog – http://www.ion.icaew.com/insolvencyblog/post/Launch-of-the-insolvency-complaints-gateway – that refers to the need to disclose the Gateway to anyone who wants to complain and in engagement terms, if they refer to the firm’s complaints procedure.  This blog also stated that there was no need to inform creditors of existing cases, which leaves me wondering what the expectation is to communicate with creditors generally on post-Gateway cases.  Given the Insolvency Service’s emphasis on the Gateway, I am a little surprised that the RPBs seem to be relying on some kind of process of osmosis to get the message of their expectations out to IPs.

From the two roadshows that I attended, I sense that there is a general expectation that IPs’ websites will display details of the Gateway (although I hope that the RPBs will take a proportionate approach, given that some smaller practices’ websites are little more than a homepage).  I do not get the sense that the RPBs expect the Gateway’s details to be added to circulars to creditors generally, but only that they should be included in any correspondence with (potential) complainants.

Allison also highlighted that, whilst the ICAEW’s bye-laws (paragraph 1.2 at http://goo.gl/1frWQo) include a requirement that all new clients be informed of their right to complain to the ICAEW and be provided with the name of the firm’s principal to whom they should complain, when writing as an insolvency office-holder the need to refer parties to the Complaints Gateway takes precedence over this requirement.

Caroline commented that IPA monitoring visits will include a review of the practice’s internal complaints process to see how these are handled before the complainant resorts to the Gateway.  If complaints are not handled by the IP, the monitors will also be exploring how the IP is confident that complaints are dealt with appropriately.

Why Attend the Roadshows?

I hope that the above illustrates the value of attending an RPB roadshow.  However, I think it also illustrates the risk that we learn about previously unknown and not altogether satisfying views on regulatory matters.  I realise that I am not blameless in this regard: when I worked at the IPA, I also used the roadshows as a medium to convey my thoughts on issues identified in visits and self certifications, so I should not be surprised that this practice is continuing (or indeed that others hold views different to my own!).  I and many of my colleagues were ever conscious that there was no other medium for Regulation Teams to deliver such messages and forewarn IPs of hot topics and evolving regulatory expectations.  Dear IP was the only other method that came close, but as this is controlled by the Insolvency Service, I could only hope that the RPB perspective would not become lost in translation.

The Advantage of Written Guidance?

I hope that, if I’ve got the wrong end of any stick waved at either of the two roadshows, someone will shout – please?  Given the limited audience at roadshows and the risk of Chinese Whispers, it must be better for the RPBs to convey their messages in written form, mustn’t it?

“The 18 month Rule”

A recent example, however, illustrates that even written communications can be unsettling.  At http://www.ion.icaew.com/insolvencyblog/post/The-18-month-rule—it-s-for-real, a QAD reviewer’s blog starts by stating that “there is a suggestion from some compliance providers and trainers that the 18 month rule for fixing fees may not be definitive, and that you still have the option of applying to creditors after the expiry of the 18 month period”.  I shall start by confessing that it’s not me, honest: I’ve never had cause to scrutinise these provisions.  However, now that I do, I have to say that I am struggling to see how the Rules can be interpreted in the way that the Service and the ICAEW are promulgating.

The blog states: “Our interpretation is that if fees haven’t been fixed within 18 months it will be scale rate in bankruptcies or compulsories or a court application. We recently raised the issue with the Insolvency Service and their view is: ‘. . . after 18 months the liquidator is only entitled to fix fees in accordance with rule 4.127(6) unless the stated exceptions apply’.  Clearly this relates to liquidators in compulsory liquidations, but the principal extends.”

I have long thought that this indeed was what the Service had intended by the Rules amendments, but on closer inspection I’m afraid I really can’t see that this is what the Rules state.  R4.127(6) states: “Where the liquidator is not the official receiver and the basis of his remuneration is not fixed as above within 18 months… the liquidator shall be entitled to remuneration fixed in accordance with the provisions of Rule 4.127A.”

“Shall be entitled…”  When I reach state-pensioner age, I shall be entitled to travel on buses free of charge, but that does not mean that the only way I will be able to get to town is by taking a bus.  Similarly, after 18 months, the liquidator shall be entitled to remuneration on the scale rate, but does this mean that the liquidator is only entitled to fees on this basis?  What statutory provision actually prohibits the liquidator from seeking creditors’ approval of fees on another R4.127(2) basis after 18 months?

And how do the Rules “extend” this compulsory liquidation principle to CVLs?  R4.127(7-CVL) states: “If not fixed as above, the basis of the liquidator’s remuneration shall… be fixed by the court… but such an application may not be made by the liquidator unless the liquidator has first sought fixing of the basis in accordance with paragraph (3C) or (5) and in any event may not be made more than 18 months after the date of the liquidator’s appointment.”  Given that the construction of this rule is so different from R4.127(6), it is difficult to see how both rules can be considered as reflecting the same principle.  And in any event, this simply states that a court application may not be made after 18 months (which seems to be precisely the opposite of the ICAEW’s blog post!).  How can this rule be interpreted to the effect that the liquidator cannot seek creditors’ approval for fees after 18 months?  The Rule starts: “If not fixed as above…”, so the rest of the Rule is irrelevant if the fees are fixed as above, e.g. as specified in R4.127(5) by a resolution of a meeting of creditors; I see no provision “above” prohibiting the seeking of a creditors’ resolution after 18 months.

I shall be interested to see how this matter gets handled in a future Dear IP.  In the meantime, what should IPs do?  I reckon that the only certain approach is: seek approval for fees before the 18 months are ended!

(UPDATE 12/01/2015: for another view of the 18-month rule, take a look at Bill Burch’s blog, which to be fair pre-dated mine by some months: http://goo.gl/4ucKaF.  Bill posted another article today at http://goo.gl/jL3WNu, reminding IPs that the wisest course is to seek early fee approval whether or not we agree with the regulators’ interpretation.)

This blog illustrates to me that there must be a better way for the regulatory bodies to convey – considered and sound – explanations of certain Rules and their expectations to IPs.  As a compliance consultant, I suffer many a sleepless night worrying about whether my interpretation and understanding of current regulatory standards are aligned with my clients’ authorising bodies’ stance.  I do value my former colleagues’ openness and I do try to keep my ear to the ground with many of the authorising bodies – I’ll take this opportunity to make a quick plug for the R3 webinar on regulatory hot topics that I shall be presenting with Matthew Peat of ACCA in February 2015.  However, I believe there is a need and a desire in all quarters for the creation of a better kind of forum/medium for ensuring that we all – regulators, IPs, and compliance specialists – are singing from the same hymn sheet.

Have a lovely long break from work, everyone.  I’ll catch up again in the New Year.


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The Kempson Review of IP Fees – a case of Aussie Rules?

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Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – 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 [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.


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Two Scottish Cases: (1) Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration and (2) Proper Court Procedure Catches Out Administrator

Although these two cases are much more for readers north of the Border, it seems to me that principles arising from the first case – that officers of the court have greater concerns than simply getting paid and that IPs and solicitors should be always alert to conflicts of interest – are relevant to many more of us.

Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration
Re Quantum Distribution (UK) Limited (In Liquidation) [2012] CSOH 191 (18 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH191.html

Summary: The judge in the Court of Session hoped that the publication of his opinion “will discourage a repetition of the unacceptable events” (paragraph 1). Lord Hodge’s criticisms were leveled primarily at a liquidator who had bypassed the court to obtain his remuneration from a newly-formed liquidation committee despite a very critical report from the court reporter. He also criticised the petitioning creditor’s solicitors, who also acted for the IP on some matters, for failing to make clear to the liquidator his need to take separate legal advice when they were in a position of conflict of interest.

The Detail: The court only learned of the events when the Auditor of Court raised his concerns with Lord Hodge. The Auditor had produced “a most unusual report” that concluded that, in light of the concerns identified by the court reporter, he was unable to report what would be suitable remuneration of the liquidator.

The court reporter’s concerns included questions regarding a settlement for the insolvent company’s ultimate parent (“QC”) to pay £50,000 each to the liquidation and to the petitioning creditor (“IEL”), although it was unclear what direct claim IEL had against QC. The reporter criticised the liquidator for charging time for brokering the deal, which he suggested was not an appropriate agreement, to the general body of creditors; for failing to disclose the settlement to creditors; and for adjudicating IEL’s claim without taking into account mitigating factors. He also suggested that the petitioning creditor’s solicitors appeared to have a clear conflict of interest in also acting as the liquidator’s adviser and that the petitioning creditor “had been allowed to exert undue influence over the liquidation” (paragraph 23).

However, it appears that, despite receiving the Auditor’s report declining to report what would be suitable remuneration, the liquidator did not make enquiries into what the court reporter’s concerns were, but instead he convened a meeting of creditors to form a liquidation committee and obtained approval for his fees from the committee, which the judge considered was “not acceptable behaviour” (paragraph 36). Lord Hodge expressed concern that the liquidator and the solicitors showed “a striking disregard of their obligations to the court. It appears that nobody applied his mind to why the Auditor said what he did or showed any curiosity as to what the court reporter had said in his report. The concern, as the emails show, was simply how to get the liquidator his remuneration” (paragraph 37). The judge’s opinion was that, as officers of the court, the liquidator and the solicitors’ staff should have brought the concerns of the court reporter to the attention of the court.

The liquidator was also criticised for failing to disclose the full terms of the settlement to the liquidation committee. In addition, it seems that the liquidator had failed to recognise that the compromise needed the court’s approval.

In reviewing the solicitors’ position, Lord Hodge commented that “solicitors who act in an insolvency for both the petitioning creditor and the insolvency practitioner need to be much more alert to the dangers of conflict of interest… It may be acceptable for a firm of solicitors so to act when the petitioning creditor’s claim is straightforward and not open to dispute. But where the claim is complex and is open to question, the potential for conflict of interest should bar the solicitor from so acting. In my opinion claims for damages for breach of contract often are of that nature, particularly where, as here, they entail a claim for loss in future years” (paragraph 40).

Proper Court Procedure Catches Out Administrator
Re Prestonpans (Trading) Limited (In Administration) [2012] CSOH 184 (4 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH184.html

Summary: Is it correct to seek remedy under S242 (gratuitous alienations) by means of a petition? The judge decided that it was not, but he left open the question of whether the consequence should be that the joint administrator should begin the process again, given that no prejudice, inconvenience or unfairness would flow from continuing with the petition process.

The Detail: The joint administrators petitioned that an assignation granted by the company amounted to a gratuitous alienation under S242. Counsel for the respondents sought dismissal of the petition with the argument that the remedy is available only by way of summons, not by petition.

The case turned on the interpretation of rule of court 74.15, which states that applications under any provision of the Insolvency Act 1986 during an administration shall be by petition or by note in the process of the petition lodged for the administration order. The judge compared the wording of the rule of court prior to the 2002 Act, which listed the applications that should be made by motion in the process of the petition (because, of course, pre-2002, all administrations were instigated by petitions). Lord Malcolm then concluded that rule 74.15 “covers an application which relates to the supervision of, and is incidental to the administration, such as those specifically mentioned in the pre-existing rule; and does not apply to proceedings brought by administrators under sections 242 and 243 of the 1986 Act” (paragraph 10).

However, Lord Malcolm questioned whether, in this case, it followed that the proceedings should be dismissed as incompetent. He acknowledged that, “in the present circumstance, when no prejudice, inconvenience or unfairness would flow from persisting with the current petition, it would be unfortunate if the petitioners were required to begin again before the same court, albeit in a different form of process, with all the consequential extra expense and delay” (paragraph 16), however the rule of court remains. He invited the parties to address him further on this issue and concluded that this case supported the call for the abolition of the distinction between ordinary and petition procedure in the Court of Session.