Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.

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Pre-packs: an oxbow lake in the making?

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Yes, I know it’s an odd title, but all will become clear, I hope.

Water takes the line of least resistance, so when a river course forces water to make a laborious curve, the water eventually finds a short-cut, bypassing the tiresome curve and leaving it high and dry, as a lake cut off from the dynamic water-flow.

I understand the political imperatives behind the pre-pack puffing and blowing… I think.  I also know that Teresa Graham’s vision of a revised SIP16, along with the voluntary pre-pack pool, viability review, and generally sensible marketing essentials, will come to fruition.  However, I suspect that this may be only postponing another inevitable: legislation, which finally may choke the life out of pre-packs… but only because industry will find another way.

When Teresa Graham’s report was released in June 2014 (http://goo.gl/oVhnXt), I resisted the urge to blog my thoughts, mainly because there were plenty of other people more authoritative than me who were saying much the same things that I was thinking.  Bill Burch’s blog was a good one: http://goo.gl/Esm5yr.

Whatever our criticisms are, the Graham Report has reached the status of something indisputable in the same way that the OFT market study on corporate insolvency has.  I feel that we are past the point where the principles are up for debate, as demonstrated by the ICAEW’s announcement of the SIP16 consultation: the JIC is “solely seeking views on whether it will be practical for an insolvency practitioner to comply with the requirements contained in the revised version of the SIP” (http://goo.gl/yVepVw).  Still, it’s nice of them to ask.

To Market or Not to Market?

I think we have come a long way in a relatively short time: Dr Frisby’s 2007 research suggested that perhaps only 8% of pre-packed businesses had been marketed, whereas I would not be surprised if now less than 8% of pre-packed businesses were not marketed.

Is a sale preceded by zero marketing ever acceptable anymore?  Ms Graham accepted as “true in some circumstances” that marketing is not possible or that marketing itself will harm creditors’ proposals (paragraph 9.24).  However, I am not sure what message we should be taking away from the revised SIP16, which states that “marketing a business is an important element in ensuring that the best available price is obtained for it”: does this mean that, if a business is not marketed, the best available price is never ensured?  And where does best outcome fit in?  The best sale price is not the whole story.

“Comply or Explain”

For many years, we have regarded SIPs as required practice, not best practice.  Thus, when we are told to do something, we know we should do it or be prepared to face the wrath of our regulator.  Of course, there will always be circumstances in which one has to decide to break a rule – a bit like needing to drive across a road’s solid white line in the interests of safety – but I feel that a rule-book that states: “this is what you should do” and then immediately follows this with: “but if you don’t, then this is what you should do” lacks credibility, doesn’t it?

The SIP (paragraph 10) states that “any marketing should conform to the marketing essentials”.  However, it then states that “where there has been deviation from any of the marketing essentials, the administrator is to explain how a different strategy has delivered the best available price.”  Ah, so as long as we can justify that our focus has been to achieve “the best available price”, then we don’t need to follow the “marketing essentials”.  Not only does that not make them particularly essential, but it also makes me wonder: why have them at all?  Why not simply state: “do (and explain) what you think is right to achieve the best possible price”?  Possibly because that was the world before the first SIP16 was born – and evidently it was not enough to instil confidence in the process.

Hindsight is a Wonderful Thing

The marketing essentials include: “particularly with sales to connected parties… the administrator needs to explain how the marketing strategy has achieved the best outcome for creditors”.  This assumes that the correct marketing strategy will always achieve the best outcome for creditors.  With the best will in the world, this is unrealistic.

For example, a director offers £100,000 to purchase the business and assets.  Attempts are made to attract other interested parties, but no one else comes forward, so the deal is done with the director at £100,000.  Taking the marketing costs into consideration, has this achieved the best outcome for creditors?  And what if, seeing that no one else is interested and, perhaps in the pre-administration pause, nervous staff or customers jump ship, the director decides to drop his offer to £80,000, has the marketing strategy still achieved the best outcome for creditors?  With hindsight, maybe the best marketing strategy would have been not to have marketed at all.

Maybe we’re being asked not to measure creditors’ outcome in financial terms alone.  Ms Graham reported that some people she spoke to “stated that, if returns are to be low, they would not mind a slightly reduced return… if the sale and marketing process was more transparent” (paragraph 7.26).  So maybe “best outcome” includes a sense of contentment that at least there were attempts to search out the best offer.  I doubt that this is how we’re meant to interpret the SIP – after all, a few creditors might prefer to see a business destroyed rather than to see it back in the hands of the directors – and of course an administrator can only really measure success in terms of achieving the statutory purpose of administration.  It seems a big ask to expect marketing strategies always to achieve the best outcome.

I should point out that I am not anti-marketing.  I just struggle with this unrealistic SIP.  If I close my critical eye, I can see that, in general, the revised SIP’s approach to marketing is sensible.  Whether it will make a difference to prices paid for businesses, I don’t know.  It seems to me that all too often the present incumbents are so emotionally caught up in a business that they offer more than anyone independent in any event.  I also regularly see IPs playing hard-ball, declining a hand-shake in an effort to extract increased offers.  If the revised SIP ensures that all IPs do the sensible thing in marketing (or even in deciding not to market) a business and are seen to be doing it, then fair enough.

Improving Confidence

Will the revised SIP improve confidence in pre-packs?

I do believe that the pre-pack pool may persuade some that the deal was right (although there are bound to be those who simply widen their scope of conspirators to include the pool).  I suspect the pool will be used sometimes, but I do wonder whether we will see many viability reviews: why would a director put his neck on the line (given the risk of Newco’s failure), if he doesn’t have to?  What’s the worst that will happen if no viability review were created?  The administrator would report that he’d asked for one, but not received it.  If the existing statutory offence for failing to submit a Statement of Affairs does not persuade directors to submit one, I cannot see that a SIP requirement for a viability review will have any greater success.

And will the review be worth the paper it’s written on?  It’s not as if the director is going to forecast a meltdown.  Teresa Graham hopes that viability reviews “will reduce incidences of failure… by focussing the minds of those controlling new companies” (paragraph 8.27).  Well, I guess it could clean the rose-tinted specs of some directors reluctant to accept defeat; it might make a few think twice about going through with Newco at all, perhaps resulting in more fire-sales.

Cutting off the Flow

The SIP requirements for connected parties (or is that “purchasing entities”?  The revised SIP is inconsistent on this point) to approach the pool and to prepare a viability review are voluntary, but the government has waved its stick, proposing in the current Bill a reserve power to restrict pre-packs (and potentially all sales in administrations), which “would only be used if the voluntary reforms are not successfully implemented” (http://goo.gl/IbQsLd).

How will the government measure success?  Will it be in increased sales considerations (which would be difficult to compare and which might happen simply because of more buoyant market conditions)?  Or by creditors reporting “improved confidence” in pre-packs?

The issue I have is that, to paraphrase Gloria Hunniford (in her One Show report in June 2013: http://goo.gl/wqcQJd), the perception of a company going bust one day and re-opening the next with the same directors and the same products in the same spot will always be greeted by some with horror and disgust.  As long as something approaching this occurs – whether it is a pre-pack administration with all the bells and whistles or something else – I cannot see these critics feeling any more comfortable about them.

Teresa Graham wrote: “To hobble the whole process to eliminate some areas of sub-optimal behaviour seems to me to be akin to throwing the baby out with the bathwater” (paragraph 8.11).  I think that the expectation of the use of the pre-pack pool and viability reviews, along with the ever-more complex disclosure requirements of the revised SIP16, does hobble the process, especially so if the government resorts to legislation in the future.

Ever since the first SIP16 was released, we’ve seen the flow of business sales start to diverge away from pre-pack administrations.  I remember being at a conference shortly after the first SIP16 was released and an IP telling me that it heralded the death-knell for pre-pack administrations; he’d envisaged that all sales would be done pre-liquidation or immediately on liquidation.  And of course, as currently worded, SIP16 does not apply to sales where there have been no negotiations with the purchaser prior to the appointment of administrators.  A coach and horses can also be driven easily through the SIP16’s use of an undefined “connected party” (personally, I’d prefer to see something on the lines of SIP9, e.g. “proposed sales that could reasonably be perceived as presenting a threat to the vendor’s objectivity by virtue of a professional or personal relationship with the proposed purchaser”).  With such burdens thrown on connected party pre-pack administrations, does anyone seriously think that this will be the option of choice over simpler, cheaper, methods?

Pre-pack administrations could end up being rarely used, left high and dry whilst a dynamic stream of businesses are bought and sold along a more efficient route.  Having all but legislated pre-pack administrations out of existence, what will the government do then?  Who knows – but by then, we will probably have a new government ministering to us.

The consultation closes on 2 February 2015 – the ICAEW has released it as a JIC consultation, but I’ve not seen any other body announce it.  I thought I’d add my penny’s worth.  My response is here: MB SIP16 response 25-01-15, although I have to confess that I’ve only tackled the semantics: if we’re to be measured against this SIP, then at least I’d like to see it less ambiguous.


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SIP16: A Clean Slate

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Will this new SIP16 quench the fires burning for pre-packagers? Will it improve the transparency of, and confidence in, pre-packs, which was the stated aim three Secretaries of State ago when this SIP16 revision process began? Who knows, but woe betide any IP who turns out a non-compliant SIP16 disclosure after 1 November!

So what changes do firms need to make over the next four weeks?

Diaries

The new SIP16 timescale is half that of Dear IP 42: the explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction (paragraph 11).

The “Information Disclosure Requirements”

Now that there are 25 disclosure points (as compared with the previous 17), I think there is no practical way of ensuring compliance unless templates stick rigidly to the list in the SIP; personally, I think that’s a shame, but there it is. To avoid any possible confusion, perhaps it is best to create a standalone document, which can form an appendix/attachment/enclosure to the letter to creditors and to the administrator’s proposals, as SIP16 now requires that the statement is provided in proposals (although I think most IPs are doing this already).

You may find that some disclosure points that look familiar to those in the current SIP have acquired subtle differences – e.g. not only does “any connection between the purchaser and the directors, shareholders or secured creditors of the company” need to be disclosed under the new SIP, but “or their associates” has been added. Therefore, rather than trying to edit SIP16 lists appearing in existing templates, perhaps it’s as well to tear them up and start afresh. Also, the new SIP16 groups points under sub-headings, which creates a better structure for the disclosure than the previous SIP, so I think it would help coherence (and help anyone checking off compliance) to follow the SIP’s order.

The old SIP’s paragraph 8, which was so loved by the regulators as encapsulating what the SIP16 disclosure was all about, appears almost word-for-word as a key principle in this new SIP. Paragraph 4 states: “Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, to demonstrate that the administrator has acted with due regard for their interests”. Although the Information Disclosure Requirements seem all-encompassing, could someone argue that ticking all those boxes does not meet the paragraph 4 requirement but that, in some cases, a bit more fleshing-out is required? Now that they have been beefed up, I don’t think there’s much risk that the Insolvency Service/RPBs would expect more than those Information Disclosure points, but it does suggest that a degree of sense-checking would be valuable: perhaps someone in the IP’s firm (but not involved in the case) could cold-read draft SIP16 disclosures and see whether they hang together well or whether they leave the reader with questions. I know that it’s a practice that some IP firms already conduct in the interests of transparency.

Other Required Disclosures

I think it would be easy to focus exclusively on the “Information Disclosure Requirements”, but that would be a mistake as there are other items nestled within the SIP that need to be taken care of.

• Paragraph 3 states: “An insolvency practitioner should differentiate clearly the roles that are associated with an administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the administrator). The roles are to be explained to the directors and the creditors.” Although a similar paragraph appeared in the old SIP with regard to communicating with directors, it might be well to double-check that this, as well as the additional points in paragraph 5 of the SIP, are covered off in the engagement letter to directors. And note that, now, the distinction between the roles of the IP also needs to be explained to the creditors.

• Paragraph 9 introduces a new requirement. It states that the pre-pack explanation should include “a statement explaining the statutory purpose pursued and confirming that the sale price achieved was the best reasonably obtainable in all the circumstances”.

As in the old SIP16, if the disclosure points are not provided, the administrator should explain why. There are a couple of other required explanations for not providing things that are new:

• If the seven day timescale is not met for the SIP16 disclosure, the administrator should “provide a reasonable explanation for the delay” (paragraph 11). If this timescale cannot be met, the SIP requires the administrator to provide a reasonable explanation of the delay. Although the SIP does not state it, presumably you would provide this explanation within your SIP16 disclosure that you would send as swiftly as possible, albeit late.

• If the administrator has been unable to meet the requirement to seek the requisite approval of his proposals as soon as reasonably practicable after appointment, he should explain the reasons for the delay (paragraph 12), again presumably within the proposals whenever they are issued.

Internal Documents

The new SIP pretty-much repeats the old SIP’s requirements for some internal documents:

• Under the heading, Preparatory Work, paragraph 7 states: “An administrator should keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale” (this was in the old SIP’s introductory paragraphs).

• Under the heading, After Appointment, paragraph 8 states: “When considering the manner of disposal of the business or assets as administrator, an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. Okay, it doesn’t mention explicitly internal documents, but it seems to me that contemporaneous file notes – justifying the manner of disposal as in the interests of creditors as a whole or, if the administrator does not believe that either of the first two administration objectives are achievable, that it does not unnecessarily harm the interests of the creditors as a whole (i.e. Paragraphs 3(2) and 3(4) of Schedule B1 of the Insolvency Act 1986) – should help demonstrate such consideration.

The Future

So is there anything in the old SIP that has been left out of the new SIP? No, nothing of any real consequence, although it did strike me how far we’ve come – that it was felt that the 2008 SIP16 needed to explain, with case precedent references, that administrators have the power to sell assets without the prior approval of the creditors or court. Have we moved on sufficiently from those days, do you think?

When you think of it, it wasn’t too long ago when we were faced with draft regulations requiring three days’ notice to creditors of any pre-pack; they were set to come into force on 1 October 2011. And I don’t think the other ideas, for example that all administrations involving pre-packs should exit via liquidation with a different IP/OR appointed liquidator, have completely disappeared.

However, I think that what this new SIP does is provide us with a clean slate. To some extent, we can file away the Insolvency Service’s statistics of non-compliance with the old SIP16 along with our copies of Dear IP 42 and we can concentrate on getting it right this time. However frustrated and irritated we might feel at having to meet these rigid disclosure requirements, I hope that IPs will strive hard to meet them. It may not silence the critics – let’s face it, it won’t – but it will give them one less stick with which to beat up the profession.


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Still not the Eurosail Judgment

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Even if you’ve been living in a cave for the past few weeks, you will not have escaped the flood of comprehensive legal updates on Eurosail. Consequently, I’m not even going to attempt to cover the case here.

Instead, something completely different: I thought I would convey my thoughts on the recent SIP re-drafts, now that the consultations are over.

SIP3A (Scotland)

I feel ill-equipped to comment on this SIP, so I am sure that my peripheral thoughts stack up poorly against those of you who deal with Trust Deeds on a daily basis.

Having seen the substantial tone change of the draft SIP3 (E&W), i.e. the stripping-out of a vast amount of prescription from the current SIP3, I felt that this new draft SIP3A stood in stark contrast, containing much of the existing prescription and even adding to it in some areas. I sense that a fairly large proportion of insolvency professionals prefer prescription to principles – as I mention below, personally I don’t place myself in that crowd – but I do wonder whether even those people would feel that this SIP3A draft has the balance wrong.

I had to chuckle at the SIP consultation response form mentioning that “matters being addressed in the PTD Regulations will not be included in SIP3A”; I counted at least 13 paragraphs that pretty-much simply repeat a statutory requirement. For example, what exactly is the point of including in a SIP: “Trustees should comply with the procedures for bringing the Protected Trust Deed to a close as detailed in the Regulations”?!

I understand that I was not alone in questioning the SIP’s directions regarding face-to-face meetings. Put into an historical context, I am not surprised to see this draft SIP3A require visits to the business premises in all cases where the debtor is carrying on a business. E&W followed a 2-stage process to drop physical meetings for IVAs: the current SIP3 (E&W) requires meetings in person for trading individuals, but – thankfully, in my opinion – the re-draft SIP3 has left this to the IP’s judgment. However, do PTD Trustees need to take the same incremental steps? Can we not focus on what is the purpose of a physical meeting? Are all debtors in business so untrustworthy and difficult to read that the IP/staff have to check out every story for themselves?

There seem to have been some unhelpful cut-and-pastes from the AiB Guidance, resulting in some contradictions and some matters, which I feel are not fit for a SIP (e.g. the purely procedural requirement to advise the AiB of the debtor’s date of birth). There seems to be a contradiction in that para 6.9 requires the IP to “quantify the equity in each property as accurately as possible before the debtor signs the Trust Deed”, but para 6.13 sets a deadline of the presentation of the Trust Deed to creditors. This para also prescribes how the equity should be assessed, but it seems to me that desk-tops and drive-bys might meet para 6.13 but not the (excessive?) accuracy criterion set out in para 6.9. And what if the equity is clearly hopelessly negative? Does the IP really have to go to the expense of quantifying it as accurately as possible before the Trust Deed is signed?

I have never been keen on SIP3A covering fees issues that I feel should be placed in SIP9. This historical mismatch has led to a fees process for PTDs that, to my mind, has never mirrored that for other insolvency processes as per SIP9. This issue is repeated in this draft. For example, SIP3A para 8.4 refers to payments to associated parties as defined in statute, whereas for some time now SIP9 has wrapped up, not only payments to statutorily-defined associates, but also payments “that could reasonably be perceived as presenting a threat to the office-holder’s objectivity by virtue of a professional or personal relationship” (para 25). SIP3A’s overlap, but not quite, of this SIP9 point is less than helpful: Trustees might be lulled into a false sense of security in feeling that they are complying with SIP3A whilst overlooking a breach of SIP9.

I also feel that it is a shame that this draft repeats the current SIP3A words: “all fees must be properly approved in the course of the Trust Deed and in advance of being paid” (para 8.6). I know what the drafter is getting at, but how is it that fees that are properly set out in a Trust Deed, which has subsequently achieved protected status, are not already “properly approved”? And why do Trustees have to go through an additional step in the process that is not required for any other insolvency process per SIP9?

SIP3 (IVAs)

I understand that some have taken issue with the draft SIP’s perceived more onerous tone. I can see that repeated use of words like “be satisfied”, “ensure”, “demonstrate”, and “assessment” seem more onerous than the current heavily-prescriptive SIP3, but, speaking from my perspective as formerly working within a regulator, I am not sure if it is intended to mean much more in practice. If IPs are not already recording what they do, how they do it, and what conclusions they come to, I would have thought they were at risk of criticism by their authorising body. In addition, many of the requirements relate to having “procedures in place” to achieve an objective, which is how I think it should be – IPs should be free to use their own methods applied to their own circumstances; I believe that it is the outcome that should be defined, not the process – but I do accept that this means more thinking-time for IPs and perhaps more uncertainty as to whether they have the processes right so that they’re not doing too little or too much.

Overall, I think that the draft SIP focuses attention where it is needed; it highlights the softer skills needed by an IP that draw on ethical principles rather than statutory requirements.

I also welcome the reduced prescription. Although I suspect that many IPs will not change their standards as regards, for example, content of Nominees’ reports and Proposals, at least they may find that they are picked up less frequently than in the past where a document has failed to tick a particular SIP3 box… provided, of course, that they meet the principle of providing clear and accurate information to enable debtors and creditors to make informed decisions.

There are a few areas where I feel that more careful drafting is needed. For example, there seems to be a difference in expectations as regards the advice received by a debtor depending on who gives the advice. Paragraph 11 d states that, if an IP is giving the advice, “the debtor is provided with an explanation of all the options available, and the advantages and disadvantages of each, so that the solution best suited to the debtor’s circumstances can be identified and is understood by the debtor”. However, the level of satisfaction required by an IP who becomes involved with a debtor at a later stage is simply that he/she “has had, or receives, the appropriate advice in relation to an IVA” (paragraphs 12 a and 13 a). It would seem to me that “appropriate advice in relation to an IVA” may be interpreted as being far more limited than that described in paragraph 11 d.

Although I applaud the move to freeing IPs to exercise their professional judgment as to how to meet the principles and objectives, I confess that there are a few current SIP3 items that I am sad to see go. And having griped about SIP3A’s interference with fees issues, I feel doubly embarrassed to admit that I quite like the current SIP3’s treatment of disclosure of payments to referrers, which is narrowed in scope in the draft new SIP3 (e.g. under the new draft, a referring DMC’s fees (whether the DMC is independent of the IP/firm or not) for handling the debtor’s previous DMP need not be disclosed). I also like the current SIP3’s requirement to disclose information in reports if the original fees estimate will be exceeded (para 8.2) and the current SIP3’s direction on treatment of proxies where modifications have been proposed (paras 7.8 and 7.9). But I accept that, as a supporter of the principles-based SIP, I should be prepared to let these go.

Talking of principles v prescription…

SIP16

Before the draft revised SIP16 had been released, I had been encouraged by the Insolvency Service’s statement dated 12 March 2013, reporting the Government’s announcement of a review of pre-packs, which stated: “Strengthened measures are being introduce (sic) to improve the quality of the information insolvency practitioners are required to provide on pre-pack deals” (http://www.bis.gov.uk/insolvency/news/news-stories/2013/Mar/PrePackStatement). I was therefore most disappointed to read a re-draft SIP16 adding 14 new items of information for disclosure – would this really improve the quality of information or simply the quantity?

For example, would the addition of “a statement confirming that the transaction enables the statutory purpose of the administration to be achieved and that the price achieved was the best reasonably obtainable in the circumstances” really improve the quality? And what exactly is meant by “best price”? Does that take account of, say, the avoidance of some hefty liabilities on achieving a going-concern sale or the security of getting paid consideration up-front rather than substantially deferred from a less than reliable source or the avoidance of large costs of disposal and risk of depressed future realisations?

There also seems to be a mismatch between the explicit purpose of the disclosure – justification of why a pre-pack was undertaken, to demonstrate that the administrator has acted with due regard for creditors’ interests – and the bullet-point list. For example, how exactly does disclosure of the fact that the business/assets have been acquired from an IP within the previous 24 months (“or longer if the administrator deems that relevant to creditors’ understanding”!) support that objective? Such an acquisition may raise questions regarding the way the business was managed prior to the sale or it might even raise some suspicions of a serial pre-packer at work (wherever that gets you), but I think it contributes little, if anything, to the justification of the pre-pack sale itself.

I understand that there has been some dissatisfaction at the introduction of a 7 calendar day timescale (counting from when?) for disclosure. Personally, I think that it is damaging to the profession if creditors are not made aware of a sale for some time, but I would have preferred for there to be a relaxation of the detailed disclosure requirements so that initial notification, even if it is not complete in all respects (surely much of the detail can be provided later?), is pretty immediate. There may be all kinds of practical difficulties in getting a complete SIP16 disclosure out swiftly, particularly with the proposed additions, and I think it would be an own-goal if this meant that some IPs relied on the “unless it is impractical to do so” words to delay issuing the disclosure until they were sure that their SIP16 disclosure was perfect in all respects. Fortunately, I feel that IPs generally are cognisant of the criticisms/suspicions levelled at the profession when it comes to pre-packs and most will pretty-much clear their desks to ensure that a complete SIP16 disclosure gets out on time.

Finally, returning to my point about unnecessarily repeating statute in SIPs: it is a shame that the drafters have not taken the opportunity to remove the words: “the administrator should hold the initial creditors’ meeting as soon as practicable after appointment”, which apart from omitting the word “reasonably” (is that intended?) is an exact repetition of Paragraph 51(2) of Schedule B1 of the IA86.

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I could go on, but I’m sure I’ve bored you all already. I am certain that many of you will have come up with many more thoughts on the drafts – after all, that is the purpose of sending them out for consultation – I do hope that you have conveyed them to your RPB so that the resultant SIPs can be well-crafted, practical, unambiguous documents that support the high ethical standards of the profession.


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Four High Court Decisions: (1) how (not) to avoid personal liability; (2) LPA Receivership changes “client” for TUPE purposes; (3) out-bid Newco avoids allegations of hiving out business; and (4) discharged bankrupt refused release from family proceedings debt

I don’t think any of these judgments introduces anything new, but they might still hold a little interest:

  • Wright Hassall LLP v Morris – lessons in avoiding personal liability in post-administration agreements
  • McCarrick v Hunter – LPA Receivership results in change of client, thus no TUPE transfer of service provision
  • City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors – out-bid Newco avoids claims from purchaser finding the “cupboard bare”
  • McRoberts v McRoberts – when will a court release a bankrupt from a family proceedings debt under S281(5)?

Lessons in avoiding personal liability in post-administration agreements

 Wright Hassall LLP v Morris [2012] EWCA Civ 1472 (15 November 2012)

 http://www.bailii.org/ew/cases/EWCA/Civ/2012/1472.html

 Summary: This has been the subject of some discussion on the LinkedIn Contentious Insolvency group.  The main lessons I drew from this case are that, not only should IPs take care to avoid personal liability when signing contracts/agreements as agent (SoBO?), but also to understand who – himself or the insolvent entity – is made party to legal proceedings.  In this case, it seems that the IP did not think through the consequences of an action brought against him; he seemed to assume (or at least he attempted to rely on the assumption) that the successful litigant would rank pari passu with other administration expense creditors.  As the IP had not appealed the order, all that was left to the judge – who was asked by the litigant for directions that it be paid in priority to the other expense creditors – was the question: was the order against the IP personally or the companies in Administration?  As the companies had not been made party to the proceedings, the court on appeal concluded that it could not be the companies and thus the IP was held personally liable.

The Detail: Mr Morris, Administrator of two companies, entered into two CFAs with Wright Hassall LLP.  The judgment of Lord Justice Treacy notes: “Although the heading to the agreements made plain that the two companies were in administration, and the Appellant must have understood that Mr Morris was the Administrator, when he signed the agreements he did so without any qualification as to his personal position or reservation as to his personal liability. In due course Judge Brown QC was to find that Mr Morris signed the documents without reading them” (paragraph 5).  Here endeth the first lesson.

Later, the solicitors sought payment under the CFAs.  The court found in favour of Wright Hassall LLP, but, as described above, when the solicitors pursued payment, Morris sought to treat them as an administration expense creditor who would need to wait along with all other expense creditors.  The solicitors sought directions that they be paid in priority to the other expense creditors, but, although the issue of personal liability had not been raised before, Judge Cooke recognised that this issue was key.  He decided that Morris was not personally liable, putting some weight behind the naming of the defendant as “Morris as Administrator of… Limited” and suggested that this acknowledged that Morris was acting as agent, rather than in a personal capacity.  Wright Hassall LLP appealed this decision.

The problem identified by one of the appeals judges, Treacy LJ, was that the only defendant was Morris; at no stage had the companies been joined as parties to the litigation.  Treacy LJ noted that there was no authority for asserting that, by describing the defendant as “Morris as Administrator of… Limited”, this recognises that he is being sued as agent.  He also noted that the only way the companies could have been made party to the action was with the consent of the Administrator or by order of court, but neither of these steps had been taken.  Finally, he noted that, had the companies truly been the defendants, they would have been described as “XYZ Limited (In Administration)”.  As Judge Brown QC could only make an order against a party to the action before him, it followed that the order was against Mr Morris personally.

LPA Receivership results in change of client, thus no TUPE transfer of service provision

McCarrick v Hunter [2012] EWCA Civ 1399 (30 October 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1399.html

Summary: I have seen some commentary on the Hunter v McCarrick Employment Appeal Tribunal ([2011] UKEAT 0167/10/DA) and, as this recent appeal was dismissed, there has been no change, but I thought it was worth a quick mention.

We are all used to the principle that, if a business switches its service provider, the people employed by the original service provider are protected under TUPE.  In this case, the appointment of LPA Receivers led to employees switching employer although they provided the same services to the same properties.  However, the switch of employers was not considered to be a transfer of service provision, because the “client” had changed from the borrower to the mortgagee/receivership.

The Detail: McCarrick was employed by WCP Management Limited (“WCP”), which provided management services on a group of properties.  The mortgagee appointed LPA Receivers, who instructed a new property management company, King Sturge, and thus WCP stopped providing the service.  McCarrick then became employed personally by Hunter, who had an interest in seeing the swift end of the receivership and who made McCarrick available to assist King Sturge in the property management at no cost to the receivership.  McCarrick apparently provided the same property management services as he had before, but he was now paid by Hunter.

Subsequently, McCarrick was dismissed and he sought to claim that the dismissal was unfair.  In order to do so, he needed to prove continuity of employment between WCP and Hunter.  The Employment Appeal Tribunal decided – and this appeals court confirmed – that there was no transfer of service provision between WCP and Hunter.  It was stated that Regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 envisages that the client will remain the same throughout the transfer of service provision and “it would be quite illegitimate to rewrite the statutory provisions in the very broad way suggested by the appellant” (paragraph 37), i.e. to enable the Regulations to achieve the purpose of protecting employees in this situation when there is a transfer of service provision.  Therefore, as the client switched from the borrower to the mortgagee “and/or the receivership” (paragraph 27), Regulation 3(1)(b) regarding the transfer of service provision does not apply.

Out-bid Newco avoids claims from purchaser who found the cupboard bare

City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors [2012] EWHC 3148 (Ch) (8 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3148.html

Summary: The post-Administration purchasers of a business alleged that they found “the cupboard was bare”, but claims against “Newco” and others for migrating the business prior to insolvency failed.

What I found particularly interesting in this case was the apparent acknowledgement of the judge that the director could take certain steps in anticipation of a pre-pack sale to Newco.

The Detail: A subsidiary of the first claimant bought the business, name and assets of Lothbury Financial Limited (“LF”) from its Administrators four days after the company was placed into Administration on application of the claimants.  The claimants alleged that a former director, consultants, and employee of LF conspired to transfer the business to Lothbury Financial Services Limited (“LFS”) and thus committed serious acts of misfeasance.

Mrs Justice Proudman concluded that the claims failed.  She was satisfied that the evidence demonstrated that: LFS operated as a bona fide separate business prior to the Administration of LF; LF’s clients were not misled, but chose to follow the consultants, who had no restrictive covenants, to LFS of their own accord (the business was PR); and LFS was entitled to continue to use the name after the goodwill of LF was sold to the claimant.

As far back as summer 2009 (LF was placed into Administration on 29 March 2010), the director was taking advice from an IP regarding a pre-pack Administration, although he was also attempting to re-negotiate payment terms with the claimant in order to rescue LF.  The claimants alleged that LFS was set up and structured as part of the director’s exit strategy, that LFS was to be the destination for LF’s business.  “The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out” (paragraph 38).

So how much activity in preparation of a pre-pack is acceptable and over what kind of period?  It is noteworthy that in this case, although there was evidence of some confusion of company names on a client’s contract and an employee was described as having “overreached herself” (paragraph 28) in explaining to the London Stock Exchange’s Regulated News Section that LF had simply changed its name to LFS and moved offices, the judge found no case against the director for breach of fiduciary duty and noted that LF suffered no loss by the actions.

When will a court release a bankrupt from a family proceedings debt under S281(5)?

McRoberts v McRoberts [2012] EWHC 2966 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2966.html

Summary: A discharged bankrupt was refused release from a bankruptcy debt arising from a family proceedings order.

Although this is not a particularly surprising outcome, the judgment provides a useful summary of the factors the court considers when deciding whether to override the default position of S281(5) of the Insolvency Act 1986.

The Detail: Mr McRoberts’ bankruptcy started in September 2006.  Mrs McRoberts submitted a proof of debt for c.£245,000 being the amount owed under an order in their family proceedings in 2003 in resolution of their financial claims ancillary to their divorce.  Mr McRoberts was discharged from bankruptcy in September 2007 and the bankruptcy was concluded with no distribution to creditors.

S281(5) provides that discharge from bankruptcy does not release the debtor from such a debt, but the court has jurisdiction to release it and the court in Hayes v Hayes held that the court’s discretion in this matter is unfettered and the debt can be released after the debtor’s discharge.  The Hon. Mr Justice Hildyard considered the factors described in Hayes and continued: “As it seems to me, the ultimate balance to be struck is between (a) the prejudice to the respondent/obligee in releasing the obligation if otherwise there would or might be some prospect of any part of the obligation being met and (b) the potential prejudice to the applicant’s realistic chance of building a viable financial future for himself and those dependent upon him if the obligation remains in place. In striking that balance I consider that the burden is on the applicant; unless satisfied that the balance of prejudice favours its release the obligation should remain in place” (paragraphs 24 and 25).  He also considered that a review of the merits or overall fairness of the underlying obligation did not come into it, but that, if any modification of the order were sought, this was a matter for the matrimonial courts.

In this case, the judge’s view was that the balance remained in favour of keeping the obligation in place – the debtor had not provided evidence that any future enterprise or activity would be blighted by the continued obligation – and thus he declined to grant release.