Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Moratorium Muddles

I’m sure we’ve all been flooded with articles on the new moratorium process.  Therefore, I am avoiding the usual broad-brush approach here.  Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new provisions… although, to be honest, the closer we look, the more we find…

Jo made an early start on listing some issues in her Technical Update issued earlier this month.  If you’d like a copy, please drop us a line at info@thecompliancealliance.co.uk.

Of course, you all know where to find the Corporate Insolvency & Governance Act 2020 (“CIGA”), but for completeness, it is available at:  www.legislation.gov.uk/ukpga/2020/12/contents/enacted.  The references in brackets in this article are to provisions in CIGA, unless otherwise stated.

The Insolvency Service’s Guidance for Monitors is available at: www.gov.uk/government/publications/insolvency-act-1986-part-a1-moratorium-guidance-for-monitors.

In brief, this article looks at:

  • The need for speed and tenacity in monitoring
  • When monitors might do more than just monitor and how they get paid for this
  • The dangerous timeline of seeking creditors’ consent to an extension
  • A mixed bag of CIGA drafting issues
  • The consequences for SIP9 compliance
  • The ethics of a subsequent appointment
  • The practicalities of a subsequent appointment

 

Monitors Must Monitor, not Supervise

Over the years, I’ve seen several CVA files with seemingly half-hearted or sporadic efforts to extract information, and sometimes even payments, from directors.  A deadline may come and go, a chaser or two might be sent, and at worst efforts simply fizzle away.  The defence is run: but I have discretion… the CVA isn’t strictly in default… it is in creditors’ interests to keep the CVA ticking over even if there’s not 100% compliance, rather than see the company go into liquidation.

This approach will not work in a moratorium: the monitor needs to stay keen, the information flow needs to be far swifter and more frequent.  A monitor must end the moratorium if they think that, by reason of a directors’ failure to provide information, the monitor is unable properly to carry out their functions (A38(1)(c)).   This is not a discretionary power, it’s a “must”, and if a monitor lets things slide, I think they open themselves up to a challenge (A42).

The termination-by-monitor provision (A38) also states that the monitor must bring the moratorium to an end when “the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern” (albeit that this is modified in these coronavirus times) or when they think “that the company is unable to pay any moratorium debts or non-payment holiday pre-moratorium debts that have fallen due” (subject to the tweak in para 37 Sch 4).

This seems to call for a continual process, not a periodic one.  Of course, monitors are going to have a periodic approach to reviewing the company’s position, checking that the required debts have been paid when they fell due, checking the company’s prospects going forward and making sure that the rescue strategy remains on track.  But surely we are talking days here, not several weeks or months.

Therefore, getting the directors geared up to provide information quickly and regularly and ensuring that you have the internal resources of a disciplined team to keep up the pace are vital.

 

Not all Fees are “Monitors’ Fees”

Over recent years, several IPs have discovered to their loss the idiosyncrasies of R6.7 and R3.1, which restrict what they can be paid for after appointment in relation to pre-CVL and pre-administration costs.  CIGA has given us another trap like this.

CIGA requires the directors to complete several tasks during the moratorium such as notifying the monitor before they take steps to go into another insolvency process (A24), when the moratorium ends.  Worryingly, the directors are also responsible for extending the moratorium.  The InsS Guidance states:

“Directors may not be familiar with the rules surrounding decision making in insolvency procedures and whilst it is not part of a monitor’s statutory duty to assist directors in obtaining the consent of creditors they may choose to do so in an advisory capacity.”

Yep, InsS, I think you can rest assured that no monitor is going to trust a director to run a creditors’ decision procedure without the IP’s strong oversight, as the decision procedure rules are so complex (and made more complex by CIGA’s special voting rules)!

Thus, moratorium extensions will work in a similar way to S100 decision processes: strictly speaking, the director is tasked with the job, but they instruct an IP – almost inevitably the monitor – to do the work for them.  But, as the IP is not carrying out this work in their capacity as monitor, payment will not be classed as the “monitor’s fees”, at least not unless your letter of engagement makes it so.  Therefore, you need to ensure that you have a letter of engagement signed to cover this “advisory capacity” work.

 

Tight Timings

In brief, the timescales of a moratorium are:

  • The first 20 business days are granted on commencement
  • This can be extended by a further 20 business days by the director filing a simple form with the court
  • The moratorium can be extended for period(s) up to the anniversary by getting creditors’ consent via a decision procedure
  • The moratorium can be extended for any length by a court order

In general, the IR16 apply as regards decision procedures, so we’re looking at decisions by correspondence/electronic or a virtual meeting.

What happens if creditors ask for a physical meeting?  What if they say “no” or they simply don’t vote at all?  What if you want to adjourn the virtual meeting, but the moratorium will end in the next day or two?

With these scenarios in mind (and especially as the director needs to sign the docs), you would do well to start a decision procedure long before the moratorium is due to end.

It would have helped if the CIGA had provided that moratoria receive an automatic extension where the decision procedure’s conclusion is delayed, in the same way as an automatic extension is given where a CVA proposal is pending (A14), but hey ho.

 

Impossible Timescale

One timescale in the CIGA simply does not work.  The decision procedure requires five calendar days’ notice, but R15.6(1) (IR16) has not been disapplied, so it seems that creditors have 5 business days from delivery of the notice in which to request a physical meeting.  How does that work then??

It might help, therefore, to hold virtual meetings instead of trusting that creditors will be content with a vote by correspondence/electronic.  At least a virtual meeting is a moderately useful forum for airing grievances and concerns.  Of course, virtual meetings also do not suffer the there’s-no-changing-a-cast-vote issue of the other procedures either, so this might also help if there’s any horse-trading to be done.

 

General Fuzziness

Jo and I have spent far too long debating the following questions:

  • A17(2) requires the monitor to notify creditors of the end of the moratorium in several situations, but we can find no notification requirements if the moratorium simply ends because it has run out of time. The InsS Guidance states that “there is no requirement for the monitor to notify creditors or the registrar of companies that the moratorium has ended on expiry of the initial period of 20 business days”.  Ok, but what about where a longer moratorium ends through the effluxion of time?  And does anyone ever tell the court (or for that matter, the PPF, Pensions Regulator, FCA or PRA)?
  • Court notification of the end of the moratorium also appears lacking in other situations: when a CVA proposal has been disposed of (A14); when a court order’s deadline had been reached (A15); and when the company enters an insolvency procedure (A16). Was this intentional?
  • There also doesn’t appear to be any duty on the monitor to notify relevant persons of the end of the moratorium where a court order under A15(2) has specified a time limit (or event) after which the moratorium is ended. Maybe this is why there is no Companies House form to record this end event?
  • What exactly does A24(2) mean, where it requires the directors to notify the monitor before “they recommend that the company passes a resolution for voluntary winding up under section 84(1)(b)”? Is this triggered when the director issues notices to members or would this occur earlier, e.g. when they instruct an IP to help?
  • Why on earth do we have different prescribed content for the proposed monitor’s consent to act in A6(1)(b) and para 17 Sch 4? Do we need both (e.g. that the IP “is a qualified person” and they certify that they are “qualified to act as an insolvency practitioner in relation to the company”)?  And does a monitor act in relation to the moratorium (A6) or the company (para 17)??
  • A28 requires the monitor’s (or the court’s) consent if the company wants to pay certain pre-moratorium creditors. A28(1) states that, with such consent, “the company may make one or more relevant payments to a person that (in total) exceed the specified maximum amount”.  The “specified maximum amount” is defined in A28(2) as £5,000 or 1% of certain liabilities, but do these thresholds relate to “payments to a person… (in total)” or to payments to all such persons in total?  I think that A28(1)’s grammar leads to a meaning of payments to the person in question, but the InsS’ Guidance states that “total payments shall not exceed…”, which gives the impression that the thresholds relate to payments to all such persons.  Which is it?

 

SIP9

SIP9 applies to “all forms of proceedings under the Insolvency Act 1986”, but clearly it was not written with moratoria in mind.  Does it create any difficulties if we assume that we need to follow it (and assuming that its references to “office holder” include a monitor)?

Well, for a start, it means that we all need to draft a Creditors’ Guide to Fees, which will say… erm… not a lot, as fees are a matter for the IP and the company, apart from a couple of rights to challenge.  Of what rights should we inform “other interested parties”?  What about the requirements to justify why a fixed fee is considered fair and reasonable or to cover the “key issues of concern” such as what work we are proposing to do, the anticipated financial benefit to creditors?  Is there any expectation by RPBs that we comply with these requirements even if compliance is required only in spirit?

I know that there’s a SIP9 consultation going on, but when do we think we might see a revised SIP9 come into force..?  Could the RPBs issue some clarification in the meantime?

 

Ethical Threats

This is another area where RPB guidance would be very welcome.  In my view, the InsS Guidance does a poor job in helping IPs observe the Code of Ethics.  It states:

“The monitor is not prevented from taking up a subsequent appointment subject to the insolvency practitioner making an assessment of any threats to compliance with the fundamental principles.  Practitioners may find it helpful to refer to section 2520 of the Code of Ethics that deals with “Examples relating to previous or existing insolvency appointments” in terms of how any subsequent insolvency appointments following appointment as monitor (as administrator or liquidator for example) may be treated. The monitor should satisfy themselves that they have identified any threats to compliance with the fundamental principles and have been able to put in place appropriate safeguards to reduce any threats to an acceptable level.”

My heart always sinks when someone in the profession goes straight to the Code’s examples to see whether they or their boss can take an appointment.  At best, I think that it’s lazy, but at worst it may mean that they don’t really get it.  My heart similarly sank when I read the InsS’ emphasis on the Code’s examples.

Agreeing to act as a monitor has immediate consequences, including an immediate change in priority of liabilities in a subsequent liquidation or administration.  Some of those given an automatic leg-up may be connected to the company; they could be directors or shareholders.  The IP who becomes monitor probably advised the company on its options.  Then there are the during-moratorium self-review and self-interest threats: whether the monitor failed to terminate promptly; whether their fees were excessive; whether it was the right decision to consent to certain payments or to security being granted; and whether they have any outstanding fees thus making themselves a creditor.  All these threats need to be taken seriously and cannot be ticked off simply by seeing that there is normally no reason why an administrator may not take a subsequent liquidation appointment.

 

But who would want a subsequent appointment?

Surely the CIGA’s shifted priorities would make any IP think twice about taking on a subsequent liquidation or administration!  Would you want to risk discovering a whole host of unpaid moratorium liabilities and pre-moratorium claims ranking ahead, not only of your fees, but also of all the expenses of the liquidation or administration (paras 13 and 31 Sch 3)?  And, if you are an administrator, you must make a distribution to those creditors (para 31 Sch 3)!

I think that directors/monitors would be hard-pressed to find an independent IP willing to pick up such a murky can of worms.  It seems to me that the Official Receivers may find themselves with a delightful new source of work.  Perhaps that’s why the InsS made sure that the ORs’ fees take priority over them all (para 13 Sch 3)!

 

The Marketing Bit

Jo and I have rolled out a large part of our moratorium document pack: all the statutory docs are there – to get in to a moratorium, extend it and exit it (although we do still have the nagging questions above) – and we are in the process of topping and tailing the pack to include items like file notes to record the key decisions, which should become available in the next week or so.

The moratorium pack is available at no extra cost to all our document pack subscribers and we shall continue to update it at no further cost to these clients.  We are also happy to provide the moratorium pack as a standalone purchase – as-is when complete – for £2,000+VAT.

If you would like more information, please contact us at info@thecompliancealliance.co.uk.


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2017: it’s not all about the Rules

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A watched kettle never boils, so I’ll stop watching for the new Rules to land – having missed their “aim” of w/c 10/10/16, the Insolvency Service is now claiming that it was always their “plan” to have them issued this month – and instead I’ll shift my focus to what other delights the next year may bring.

 

A Review of the Bonding Regime

What do you think? Is the bonding regime fit for purpose? Does it really work as an effective protection?

The Government has issued a Call for Evidence to explore the weaknesses and reform possibilities of the bonding regime. The opportunity for submissions closes on 16 December 2016 and the Insolvency Service’s document can be found at: https://goo.gl/wiKc0K.

The document notes that the Insolvency Service has “seen evidence where the costs claimed by an insolvency practitioner in proving a bond claim are disproportionate to the loss suffered by the insolvent estate”, whilst the specific penalty bond premiums have increased for smaller firms by 200% in one year. No wonder there are questions over whether bonding is achieving its objective.

The Call for Evidence explores questions (albeit worded differently) such as:

  • Would a system similar to the legal profession’s arrangements for dealing with fraud and dishonesty work for insolvency?
  • Could a solution be a “claims management protocol” incorporating a panel of IPs to deal with bond claims and ways to limit cost?
  • Alternatively, perhaps the bonding regime should be abolished altogether?

 

Complaints-handling by the RPBs

In September, the Insolvency Service released a summary of its review into the RPBs’ complaints-handling processes.

The Service reported that “the introduction of Common Sanctions Guidance has improved transparency in decision-making but there is scope to ensure more consistency in the application of the guidance”. The Service’s answer is to work with the RPBs to make changes to the guidance.

Three other main recommendations emerged from the review:

 1.  The RPBs should ensure that information is sought from the IP, e.g. “if the complainant has not provided or is unable to provide evidence to support their complaint”, unless there is a justified reason not to do so (whatever that looks like).

The report explains that “the most common reasons for closing a complaint at the assessment stage are the complainant’s failure to respond to further enquiries or their inability to provide evidence to support their complaint”. The Service also reports that “the review identified that some cases had been closed which appeared to merit further investigation”. Thus, the Service is recommending that RPBs look to the IPs for the information and evidence.

The Service seems to be expecting the RPBs to conduct thorough investigations on receipt of nothing more than unsupported suspicions raised by parties who then go to ground as soon as they’re asked to explain or substantiate their allegations. The Service also seems to take no account of the costs to IPs in responding to RPB requests, which of course are not recoverable from the insolvent estates irrespective of whether the complaint is founded. Isn’t it about time that the Service stopped labouring onto IPs more and more expensive burdens whilst simultaneously pursuing the agenda that IPs’ fees need to be curbed?

2.  The RPBs should consider with the Service the feasibility of a regulatory mechanism whereby compensation can be paid by the IP to the complainant where they have suffered inconvenience, loss, or distress.

The Service is recommending this measure “to ensure fair treatment for complainants”, given that some RPBs (but see below) have a compensation mechanism, but others do not. But how often do the RPBs order compensation? This information is conspicuous by its absence from the report.

From the report, it seems that the ACCA is the only RPB with a formal compensation mechanism. In view of the fact that the ACCA is handing over its complaints-handling to the IPA with effect from 1 January 2017, surely the simplest way to make things “fair” to all complainants is to have no compensation mechanism, isn’t it?

I also do not understand the Service’s logic in arguing that compensation should be offered “where minor errors or mistakes have been made”, whilst accepting that “any such mechanism would not be a substitute for any legal remedies available to individual complainants through the Courts”. Next thing we know the Service will be expecting the RPBs to decide whether fees are excessive on fairly straightforward cases, whilst accepting that decisions on really meaty fees should remain with the courts. Oh hang on a minute…

Unfortunately, the IPA is making it easy for the Service to push its agenda: the report mentions that the IPA intends to introduce a formal conciliation process in any event (which is news to me, as I suspect it is to most IPA members).

3.  RPBs experiencing particular issues progressing complaints cases should discuss their plans with the Service.

I think this is directed mainly at the ACCA, which has come in for some heavy criticism, as reported in the Insolvency Service’s monitoring reports over the last couple of years. Now that the ACCA has announced its “collaboration” with the IPA, which will investigate and decide on complaints levelled at ACCA licensed IPs (as well as conduct their monitoring visits), perhaps the Service already will be happy to tick that box.

To read the full report, go to: https://goo.gl/radZpS.

 

Action on Anti-Money Laundering

This subject really deserves a blog post of its own. The prospects for change are coming from all directions.

“Consent” SARs no more

Actually, this happened in July, but I’ve not seen it covered elsewhere, so I thought I would shoe-horn it in here. Although the Proceeds of Crime Act 2002 refers to “consent”, the NCA has issued guidance clarifying that it will no longer be granting consent, but rather a “defence to a money laundering offence”.

The NCA has taken this step to counteract the “frequent misinterpretation of the effect of ‘consent’ (e.g. assuming that it results in permission to proceed, or is a statement that the money is ‘clean’ or that the NCA condoned the activity going ahead)”.

To request a “defence”, however, you will still need to tick the “consent requested” box on the SAR submission.

For a useful reminder on the purpose and process of consent/defence SARs, including the kinds of responses you might get back from the NCA, go to https://goo.gl/c8tJzk.

Allowing “joint” SARs and other proposals

In April, the Government (via HM Treasury) issued an “Action Plan”, representing “the most significant change to our anti-money laundering and terrorist finance regime in over a decade”, and the Government sought views on the proposed actions.

Amongst other things, the Government was proposing to reform SARs, given the enormous resource demand of c.400,000 SARs submitted each year. The proposals included doing away with the SARs consent/defence process altogether, which alarmed me considerably, but I was relieved to see that the Law Society and others (including R3, although I have to say that they were not as forceful as the LawSoc) urged the Government to reconsider.

The Government’s response on the consultation was issued earlier this month at https://goo.gl/pzezpx and the conclusions are reflected in the Criminal Finances Bill, which is now making its way through Parliament.

I can only see the proposed changes affecting IPs in exceptional cases, but in brief they include:

  • some changes to the SARs regime including empowering the NCA to obtain further information from SARs reporters, but the consent process will continue at least for the moment (“the Government will keep this issue under review”);
  • “establishing a new information sharing gateway for the exchange of data on suspicions… between private sector firms with immunity from civil liability” – I am interested to discover how this will be constructed, although the Government response does include reference to…
  • enabling “joint” SARs to be submitted, which I’m sure will be good news to all IPs who have been conscious of multiple SARs being submitted on cases involving external joint office holders and legal advisers;
  • introducing Unexplained Wealth Orders;
  • strengthening powers to seize and forfeit criminal proceeds in bank accounts or “portable high value items” such as gold.

The Fourth Money Laundering Directive

I understand that Brexit is unlikely to halt the progress of the EU’s Fourth Money Laundering Directive in the UK, which is set to be transposed into national law by 26 June 2017.

In September, HM Treasury issued a consultation on how the Directive should be implemented. The consultation document can be found at https://goo.gl/5AdhQd and it closes on 10 November 2016.

Items with the potential to affect IPs include:

  • a reduction in the threshold for cash or “occasional” transactions from €15,000 to €10,000;
  • changes in the criteria triggering simplified and enhanced due diligence;
  • a potential widening of the scope of those whose AML due diligence may be relied upon (which I find interesting given that the RPBs seem to recommend avoiding reliance);
  • potential prescription surrounding requirements for certain businesses to appoint compliance officers, to conduct employee screening, and to carry out independent audits;
  • a requirement to retain AML due diligence records for 10 years (up from 5 years); and
  • a requirement for certain Supervisors (i.e. the RPBs and others) to “take necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in, or being the beneficial owners of” AML-regulated businesses (which, personally, I think is extremely unfair – for example, is it fair to curtail someone’s career because of what their father has done?). Although the consultation refers only to accountants, solicitors and some other businesses as needing this oversight, I would be surprised if IPs escape notice when any legislation is drafted.

 

More and More Changes in Scotland

Imminent changes

As we know, the new Bankruptcy (Scotland) Act 2016 (and presumably the accompanying Regulations, which are yet to be finalised) come into force on 30 November 2016.

The AiB has headlined the Act and Regulations as “business as usual” but simply a cleaner and more straightforward reorganisation of the existing statutory instruments, the most material effect being that what was the Protected Trust Deeds (Scotland) Regulations 2013 has been written into the Act (all except from the forms, which are in the 2016 Regs).

However, inevitably the AiB has taken the opportunity to slip in a couple of changes. As drafted, the MAP asset threshold will be reduced from £5,000 to £2,000 (Regulation 14).

In its response to the AiB’s informal consultation on the draft Regulations, ICAS took the opportunity to raise a number of issues, including having another dig at the AiB’s compromising positions as both supervisor and supplier of debt management/relief services. As regards these expressions of concern and ICAS’ attempt to highlight the archaic “overly penal” use of an 8% statutory interest rate, I say: “good for them!”.

ICAS also points out apparent deficiencies in the Regulations’ treatment of money advisers, who are required under the draft Regulations to have a licence to use the Common Financial Statement, but the Money Advice Trust provides licences to organisations, not individuals. There also appears to be a flaw in the Regulations in that it does not allow a non-accountant/solicitor IP to be a money adviser if they or their employers provide other financial services.

To read ICAS’ response in full, go to: https://goo.gl/xSaKkv.

Future changes to PTDs and DAS

Earlier this year, the AiB ran consultations as part of their reviews of PTDs and DAS. The AiB published summaries of the consultation responses in July 2016 (see https://goo.gl/MW6gC5) and the AiB has promised its own responses “in the coming weeks”, although these have yet to emerge (not surprising really, given everything else going on!).

The scope of the consultation questions was vast and the reviews have the potential to affect many aspects of the two procedures.

 

New Restructuring Moratoriums and Plans… but no changes to rescue finance priority

Although the Government has not yet provided its response to the consultation, “A Review of the Corporate Insolvency Framework”, which ended on in July 2016, it has issued a summary of responses at https://goo.gl/Cf0LWK.

The summary does hint, however, that the Government is likely to take forward some of the proposals.

The introduction of a pre/extra-insolvency moratorium

If the Government were to go with the majority (yes I know, that’s a big “if”), the new moratorium:

  • would be initiated by a simple court filing;
  • would have stronger/more safeguards to protect creditors’ interests than as originally proposed;
  • potentially would not suspend directors’ liability for wrongful trading;
  • would be shorter than the originally proposed 3 months, probably 21 days;
  • could be extended without the need to obtain the approval of all secured creditors;
  • would not affect the length of any subsequent Administration (woo hoo!);
  • would be supervised only by a licensed IP (double woo hoo!);
  • would provide for costs incurred during the moratorium to be paid during the moratorium or, failing that, to enjoy a first charge if an insolvency process follows on; and
  • would provide creditors with the power to seek information (with certain safeguards and exemptions).

Essential suppliers to be held to ransom?

In contrast, consultation responses were split on whether more should be done to bind essential suppliers to keep on supplying during a moratorium or indeed during an Administration, CVA or potentially new “alternative restructuring plan”. The only clear majority response was that providing suppliers with recourse to court to object to being designated by the company as “essential” was an inadequate safeguard for suppliers.

The reaction? “Government notes stakeholder concerns and is continuing to consider the matter.”

A new restructuring plan with “cram down”

Cheekily, the consultation actually didn’t ask whether we saw value in a proposed new restructuring plan. It just asked how we saw it working.

The majority were in favour of a court-approved cram down process with the suggested addition that the cram down provisions could also apply to shareholders.

Will the long grass welcome back the proposal for super-priority rescue finance?

The Government had revived its 2009 proposal for super-priority rescue funding. Again this time, the response was pretty overwhelming with 73% disagreeing with the proposals.

 

Further Education Insolvencies

In July 2016, BIS issued a consultation that explored whether the usual insolvency procedures – as well as a Special Administration Regime – should be introduced to deal with insolvent further education and sixth form colleges in England.

The proposed objectives of the education Special Administration include to “avoid or minimise disruption to the studies of the existing students of the further education body as a whole”. The Government envisages that this emphasis would “provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.”

Although a Government response has yet to be issued (the consultation closed on 5 August 2016), my scanning of a few published responses indicates that there are some loud objections to the idea from those working in the sector. Many of those who responded to the consultation also expressed exasperation that BIS issued a 4-week consultation over the holiday period, which does seem particularly insensitive in view of the intended audience (which strangely did not include IPs!).

 

Recast EC Regulation on Insolvency Proceedings

This is another piece of legislation that is set to come into force on 26 June 2017.

I admit that my partner, Jo Harris, is far more knowledgeable on this subject than me and personally I’m waiting for her to record a webinar on it, so that I can learn all about it (no pressure, Jo! 😉 ).

 

SIP13, SIP15… and many others

The JIC’s consultations on revised drafts of SIP13 and SIP15 closed many months ago. I understand that a revised SIP13 is very near to being issued and the aim is to have a revised SIP15 also issued before the end of the year.

Given that many of the SIPs refer to the Insolvency Rules 1986 – SIP8 on S98 meetings comes immediately to mind – many will need to be reviewed over the next 5 months if they are to remain reliable and relevant (although admittedly it has not stopped SIP13 continuing to refer to S23 meetings and Rule 2.2 reports, despite the fact that they were abolished in 2003!). Well, it’s not as if we have anything else to do, is it?!


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The Proposed New Moratorium: the responses are in, but will the Government listen?

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I believe we can be proud of R3 and the RPBs. Given only 6 weeks for the Government’s summer consultation, they generated robust and reasoned responses with plenty of variation to evidence that each had been created independently of the others.

Having read every published response I’ve been able to find, I am left with a reasonably strong sense of consensus on many of the big questions. However, I suspect that not all will be welcome news to the Government or the Insolvency Service, so the question is: will they listen?

The original consultation, A Review of the Corporate Insolvency Framework, can be found at: https://goo.gl/Cf0LWK.

In this post, I pick through the 14 responses that I discovered, including those from bodies such as R3, some of the RPBs and turnaround professionals. I don’t envy the Insolvency Service’s job of working through 70 submissions.

 

A New Moratorium: why?

Almost everyone saw some value in the principle (if not in the detail) of the Government’s proposals to introduce new moratorium provisions, although several questioned the Government’s apparent motives: from the consultation document, it does seem that a desire to get the UK up the ladder of the World Bank’s “Doing Business” rankings is the main driver, which does not seem a sensible policy-making foundation.

Dentons solicitors believe that “the UK has one of the most flexible insolvency regimes, unburdened by high costs and lengthy court procedures and, perhaps most importantly, one of the best recovery rates for creditors worldwide”, so it is difficult to see what advantages the proposed new process will bring. The City of London Law Society went further by not supporting the wider moratorium proposals, failing to see how a potentially costly process that may not adequately protect creditors’ interests would be useful.

The FSB expressed concern at the apparent move towards a US-style Chapter 11 system, feeling that this shift “could result in the UK regime’s strengths being watered down for little demonstrable gain elsewhere”. Several noted that the absence of a specialist insolvency court was a serious obstacle in any attempts to move towards a workable Chapter 11 style regime.

Most struggled to see how the moratorium could be used successfully by SMEs. Even the turnaround professionals were forced to admit that “there will always be some businesses that are too small to avail themselves of such help”.

A few responders felt that more effort should be made to encourage directors to seek help early and the turnaround professional felt that the moratorium would be a useful tool in this regard.

 

A New Moratorium: how long?

Here is a summary of the responses to the Government’s proposals for an initial 3-month moratorium:

Mora

It should be noted that many answers on this question were dependent upon other changes being made to the proposed moratorium set-up. For example, whilst the City of London Law Society felt that 3 months may prove to be too short for larger or more complex restructurings, it also recognised the risk that the extensive nature of the 3-month moratorium as proposed may “simply encourage directors to put off dealing with a company’s financial difficulties. This could, in turn, lead to creditor anger and frustration should the company’s financial position deteriorate during the moratorium period.”

A similar point was made by R3, which referred to the risk that “providing companies with an entire financial quarter free from creditor pressure could lead to ‘drift’ rather than action.” Instead, R3 stated, a shorter moratorium would make clear that it was the company’s ‘last chance’ to avoid insolvency, thus “requiring concentrated effort and a clear direction of travel”.

 

Will it simply be jobs for the boys?

The Government proposed that a new moratorium be introduced, which would be “supervised” by anyone with relevant expertise in restructuring who is also either an IP, solicitor or accountant.

However, in general the cry for supervisors to come only from the IP population was made loud and clear. You might think this was inevitable from the likes of R3 and the IPA, but even the accountancy and solicitor bodies were generally strong on this point.

  • Not for solicitors?

The City of London Law Society pointed out that the SRA had only recently dropped regulating solicitors as IPs, so it would seem an odd development to have solicitors return to supervising something tantamount to an insolvency process.

  • Not for accountants?

The ICAEW pointed to the facts that “accountant” covers a wide range of people and that there is already “a large pool of [insolvency] practitioners and a competitive market”, so it would seem an unnecessary risk to widen the pool to include others who are not subject to such heavy regulation as IPs. ICAS made a similar observation, noting its understanding that “at least one third of the [accountancy] sector in the UK has not undertaken any training or possess a formal qualification” and repeating its call on the Government to designate accountancy as a regulated profession.

  • What about turnaround professionals?

Predictably, the EACTP and BM&T, turnaround consultancy, welcomed widening the role to more than just IPs, suggesting that the Certified Turnaround Professional qualification could qualify someone for the role.

Interestingly, these two responses were almost word-for-word the same in many respects, but they differed on one important point: BM&T believes that it is critically important for the supervisor to be clearly seen to be acting in the best interests of all stakeholders, whereas EACTP believes that the supervisor should act in the best interest of the company. I think this betrays one of the tensions in the proposals: is the moratorium intended for solvent companies that may be facing future insolvency or for insolvent ones? The City of London Law Society noted that the consultation document conflicts with the Impact Assessment on this fundamental point.

BM&T seemed alone in expressing the view that, in order to keep costs low, “supervisors should be subject to low levels of regulation”. I appreciate their point that the supervisor is not running the business, merely advising. However, given that a primary duty proposed for supervisors is ensuring that the moratorium – and not a formal insolvency process – remains appropriate, it does seem to me too high a risk activity to be largely unregulated. The ICAEW mentioned that, “if supervisors are not to be regulated persons, then greater court supervision may be required to minimise risks of abuse by directors and unfair prejudice of creditors”, which of course would increase costs and which in turn could have an altogether different impact on the World Bank rankings!

  • The case for IPs

R3 believes that a clear commitment to protecting creditors’ interests is important. The Government’s proposals put creditors firmly in the back seat, offering them only the power to take court action to challenge the moratorium or their status as an essential supplier, a status assigned them by the moratorium company. If the company’s use of a moratorium to give it time to see a way out of its troubles is to earn the trust of creditors, the obvious choice is regulated IPs, and certainly not, as currently seems possible, the company’s in-house lawyer or accountant.

R3 reminded the Insolvency Service of the efforts the profession has made to tackle the problem of ambulance chasers and unregulated advisers. If not carefully structured and controlled, the moratorium could appear an attractive tool for abuse by some.

  • A new professional?

Some responses highlighted the difficulty in ensuring that proposed supervisors meet the expertise criteria: the Government isn’t considering yet another different licence with potentially a whole new (and expensive) regulatory system, is it?

The IPA noted that the Government’s Impact Assessment made no mention of any costs of ensuring regulatory consistency in the event that the role is opened up to other professionals. It also reminded the Government of the new corporate-only insolvency licences, which would seem to lend themselves well to be used by non-IPs who want to develop in this area.

 

Consequences for Administrators

The Government’s proposals include two striking consequences for Administrations that are preceded by a moratorium:

  • An IP who had acted as the company’s moratorium supervisor would be prevented from taking the appointment as Administrator (or indeed any other insolvency office holder); and
  • The duration of the Administration would be 12 months minus the length of the moratorium.

Conflict of interest?

Few responded directly on this point. As you might expect, the ones that did respond fell into two distinct camps:

  • There may be clear benefits in having the same person throughout, which would reduce costs, and the creditors should have a say in who they want as Administrator (ICAEW, ICAS, R3); and
  • There would be a clear conflict of interest in having the IP supervisor also act as Administrator (EACTP, BM&T).

Personally, I cannot really see how the situation is different from a CVA Supervisor later being appointed as Administrator or Liquidator and I would expect the Insolvency Code of Ethics to be amended to treat the proposed subsequent appointment of a moratorium supervisor similarly.

Shorter Administrations?

Personally, I thought this second proposal was nonsense. Where is the logic behind giving Administrators less time to do their job simply because the company has had a moratorium? I appreciate that the perception may be that an Administration is all about exploring the company’s/business’ options, so if these are all but exhausted in the moratorium, then it should be time saved in the Administration. However, Administrators still need to get the job done and now must pay out any prescribed part dividend, which is by no means a 5-minute task. The ICAEW also made the point that at present the 12 months period “can be problematic, not least because of delays within HMRC and applying for extensions adds to work and cost”.

Although none of the consultation questions invited comments on this proposal, I was very pleased to see that several bodies managed to shoe-horn in their objections to shorter Administrations as a consequence of a moratorium. For heaven’s sake, Administrations are complex and costly enough as it is, please don’t make them any worse!

Having said that, the Law Society posed the sensible recommendation that the relevant date for excluding insolvency set-off and for voidable transaction claims should be measured from the start of the moratorium… although I would also suggest that, in that case, an insolvency office holder should be able to challenge certain dispositions occurring during a moratorium.

 

Directors’ liabilities

The consultation proposed that, provided the moratorium conditions continued to be met, directors would be protected from liability, e.g. in relation to wrongful trading, but that, should the conditions not be met and the moratorium fail, exposure for liability would resume.

This seemed a curious approach to me and the Law Society explained it well: “during a moratorium, directors will only be at risk once the company has reached the point at which they ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation’. Plainly, directors should also terminate a moratorium at, or before, that point, so that it is unnecessary to relieve the directors of liability whilst the conditions for a moratorium are maintained. Indeed, to do so would simply introduce unnecessary complexity into the law”.

The City of London Law Society also observed that suggesting that directors may avoid personal liability “could lead to inappropriate risk taking, particularly if directors believed that they could entirely rely on the views of the supervisor, rather than making their own assessment of the company’s prospects”.

 

Ranking of costs and expenses in the moratorium

Although a company would be required to have enough capital to discharge all debts incurred during the moratorium, what if the worst should happen?

Several responders agreed with the Government’s proposal that any unpaid debts incurred in a failed moratorium and the supervisor’s costs should enjoy a first charge in any subsequent insolvency (although there was no comment on the priorities between these categories).

However, R3 disagreed, noting that a company could stack up debts to connected parties during the moratorium, which would end up having priority, and so R3 believed that unpaid debts should rank alongside other claims in the subsequent insolvency. Personally, I don’t see that this potential abuse is sufficient reason to push moratorium creditors down the queue, especially in view of the other proposals regarding pressing “essential suppliers” into service during a moratorium.

The City of London Law Society also queried how it is proposed such costs and expenses would be approved for payment from a subsequent insolvency. Perhaps it would be something akin to the current pre-administration costs regime?

Several responders objected to the Government’s proposal that supplies during the moratorium should be paid for under the supplier’s usual terms of credit. BM&T made the connection that, if instead moratorium supplies are paid on a cash up-front basis, there should be no risk that debts would spill over into any subsequent insolvency.

 

Creditors held to ransom?

The “essential suppliers” proposals generated whole new lines of debate, such as the possible effects on the supplier’s trade credit insurance or debt factoring, which is material for another blog post.

Suffice to say, as worded in the consultation it seems that any supplier (…or only those with a contract? One example in the consultation is of a paper supplier) could be designated by the company as essential (by means of a court filing) with the result that the supplier would be required by statute to continue to supply on the existing terms, whilst its pre-moratorium arrears would be frozen, irrespective of the impact this might have on the supplier’s own solvency.

 

What’s wrong with the CVA moratorium?

The consultation claimed that the CVA moratorium is rarely used because it is limited to small companies. However, instead of proposing simply to widen the scope of the CVA moratorium (as ICAS has suggested), a new kind of moratorium is the proposal. This would be fine if the plan was simply to adapt the CVA moratorium to allow other restructuring solutions to flow from it, but the proposed new moratorium is different in many unconnected respects.

It is true that there are few CVA moratoria. Both the ICAEW and R3 suggested that the onerous responsibilities (and associated liabilities) of the CVA moratorium nominee deter use of the existing regime. Although we only have a skeleton proposal to judge at the moment, personally I don’t see that the new moratorium would deal with this obstacle any more successfully.

The ICAEW recommended that, to avoid any new moratorium suffering the same fate as the CVA moratorium, the reasons for its apparent lack of use should be analysed.

 

What’s wrong with CVAs?

As the only debtor in possession formal insolvency tool, you’d think that the Government might be interested in encouraging greater use of CVAs, but it seems to be missing the point.

The consultation stated that “the Government believes that the under utilisation of CVAs is largely caused by the inability to bind secured creditors”, however neither it nor its accompanying Impact Assessment provided any evidence to support this. The Impact Assessment stated that “the consultation will seek to understand fully the reasons behind” the under-utilisation of CVAs and the apparent fact that many fail (2014: 60%), but the consultation didn’t really address this at all. It simply stated that “many CVAs fail because of a failure to maintain agreed payment” – you don’t say!

R3 believes that “the most common reasons why CVAs fail is not because there is a problem with secured creditors but because the management is overly-optimistic in its financial assessment of the company, or the environment in which the company operates changes during the CVA.” The IPA makes a similar observation, suggesting that the CVA process is not at fault, but often the issue is with the underlying viability of the business. ICAS also reported that “anecdotally it is suggested that a significant proportion of CVA proposals will focus on financial/debt restructuring without addressing more fundamental and underlying operational restructuring or management change”.

In its response, R3 asked the Government to work with the profession and the creditor community to “to find ways to improve CVAs so that they can become a much more effective business rescue tool”, especially for SMEs, a request that also seems to have the support of the ICAEW and IPA.

 

And there’s much more

Some other meaty questions considered by the responders included:

  • Do the Government’s proposals achieve the right balance of debtor-in-possession and creditor protection?
  • If the balance swings too far away from creditors, as many responders fear, what will be the effects on lending?
  • What exactly are the supervisor’s role and duties?
  • How exactly should the moratorium entry criteria be defined and measured?
  • How will notice of the moratorium be publicised or even should it be publicised?
  • How would an extension to the moratorium be achieved and for how long should an extension be?
  • Who would be required to provide information to creditors during the moratorium and what kind of information should be provided?
  • Is there really a need to incentivise rescue funding, particularly by introducing contentious statutory provisions affecting existing secured creditors’ rights?

 

The consultation responses evidence that, within only a few summer weeks, a great deal of effort has been spent deliberating over the proposals, but the fun has only just begun.